Alcoa Inc.’s June quarter earnings do reflect some of the troubles faced by the global aluminium industry but it’s not the picture of doom that some may have feared. The company has painted a positive outlook for the industry in 2013, despite the concerns one may have about China’s appetite for metals.
Alcoa’s primary aluminium business saw a 7% sequential decline in price realization and it also suffered from higher costs, which resulted in a 57% decline in its adjusted Ebitda (earnings before interest taxes depreciation and amortization, a measure of operating profit) per tonne. Its alumina and engineered products and solutions businesses did well, though the global rolled products business was affected by the fall in metal prices. Adjusted Ebitda declined by 10.7% sequentially but the company’s results were a bit better than analyst estimates and its share rose on the NYSE by 1.4% on Monday.
Domestic investors should be happy to know that regional metal premiums have remained steady. Of bigger interest to them, will be Alcoa’s prognosis for the aluminium industry and end-user markets. Alcoa has maintained its earlier forecast of 7% growth for aluminium consumption in 2013, despite continuing worries about China’s economic slowdown and its impact on metals. The company sees demand continuing to come from end-user industries, especially aerospace.
Alcoa has also revised its estimate about the aluminium market’s demand-supply balance in 2013, chiefly due to curtailments of output by producers. After its December quarter results, it had forecast a surplus of 535,000 tonnes, but that has now been revised to a deficit of 315,000 tonnes. A combination of delays in additions to capacity and an increase in production cuts, chiefly in China, is responsible for the shift. But production cuts in China also mean it would import less alumina than projected earlier. That has led to expectations of a surplus situation for alumina during 2013.
If Alcoa’s expectations are proved correct, then the aluminium market should see a demand-supply situation that is conducive for prices remaining stable or at least not decline sharply. But non-ferrous metal prices also depend on the financial markets and events such as a tapering of quantitative easing by the US Federal Reserve, which too could affect prices.
Aluminium prices continue to be weak and are down by 10.2% from a month ago. The rupee’s depreciation against the dollar does give domestic companies a hedge but it may also result in mark-to-market accounting effects hurting their profits.
Alcoa’s results provide comfort that, China’s economic situation notwithstanding, the global aluminium market is not expected to see any significant distress in 2013. That comes as good news for investors in Indian aluminium companies, even as domestic demand conditions fail to inspire confidence. In the April-May period, government data shows a decline in aluminium output by 9% over the year ago period.