Alcoa angles for a shield against China

Big Aluminium has spent two years shutting smelters to shrink a supply glut that has led to rotten prices.

The strategy has been successful -- for the most part.

This Wednesday, Alcoa Inc., as usual the first U.S. major company to report results for the latest quarter, is expected to post earnings of 22 cents per share, up from 11 cents a year earlier, in part because of higher prices.

But fresh weakness in aluminium prices remains a concern for Alcoa, as some 40 per cent of the company’s sales in the second quarter of 2014 were still related to the production of aluminium and its raw material, alumina.

Raw aluminium had climbed back to over US$2,000 per tonne this summer, from a low in February of around US$1,700 per tonne.

But more recently, aluminium prices have softened. From Sept. 1 to Oct. 1, the spot price for high-grade aluminium on the London Metals Exchange fell 8.8 per cent to US$1,898 per ton. One of the biggest reasons for the recent weakening in aluminium prices, say analysts, is China, which accounts for almost half of global aluminium demand.

Industrial output in China has fallen, and with it demand for aluminium. More Chinese-made aluminium is ending up on export markets. Chinese aluminium exports were up 9.1 per cent in the first eight months, to 3.8 million tonnes, according to Global Trade Information Services. Imports, most of which are scrap, were down 0.7 per cent, to 2.1 million tonnes.

Alcoa’s stock price, benefiting from higher prices and profits, more than doubled, to more than US$17 in September from around US$8 a year earlier. Share prices for Russia’s United Co. Rusal PLC and Norway’s Norsk Hydro ASA -- other global players that along with Alcoa closed smelters and cut capacity around the world -- similarly recovered between in 2013 and 2014. In tandem with the softer aluminium prices, Alcoa shares are down from their September high, but still hovering just above US$15.

While the biggest chunk of Chinese exports consists of semifinished goods such as aluminium plate and sheet, the range of products offered by Chinese exporters is increasing, posing a challenge for Alcoa and others. “Whatever kind of aluminium China exports, it is going to have an impact on supply and demand, and the price,” said Andrew Lane, an analyst for Morningstar Inc.

That is why aluminium companies, increasingly, are looking for businesses that are less vulnerable to encroaching Chinese exports, such as sheet used to make the skin of cars and trucks, and the high-tech alloyed screws and bolts that go into airplanes.

Over the past few years, Alcoa and Novelis Inc., a unit of India’s Hindalco Industries Ltd., and Constellium NV have announced some US$2 billion of investments -- in Iowa, Tennessee, New York, Kentucky and overseas -- to meet growing demand for aluminium sheet used to make automobiles, especially in the U.S. Car makers are hungry for supplies of the metal as they try to meet new fuel-efficiency standards.

In June, Alcoa said it would buy Firth Rixson Ltd., a Sheffield, England, maker of jet-engine parts, for US$2.85 billion.

Last week, Alcoa announced the opening of a US$90 million plant in Indiana that makes aluminium-lithium, an alloy used in the manufacture of passenger airplanes. The Lafayette plant, which has a capacity to generate 20,000 tons a year, in ingot form, makes the kind of product that Chinese aluminium makers aren’t yet able to profitably produce.

Aluminium-Lithium, or Al-Li, alloys have been around since the 1920s, but have caught on recently because they are lighter than conventional aluminium. Metal engineers say that just as aluminium is taking away market share from steel in the automotive industry, aluminium alloys are encroaching on other materials, especially in the aerospace sector. Al-Li alloys can be used to make a variety of airplane parts, and the Indiana plant can make ingots “big enough to make any single-piece component on today’s aircraft,” Alcoa said.

Alcoa is “material agnostic,” said Eric Roegner, the 44-year-old chief operating officer for Alcoa’s castings, forgings and extrusions division, and president of Alcoa Defense, which sells aluminium and other metal parts for tanks, trucks, planes, ships and other military machines.

One example of a product Alcoa now makes that isn’t aluminium is a titanium alloy fastener that absorbs lightning and can attach the carbon fiber skin of an aircraft to a structure made of metals, including aluminium. On average, “planes get hit twice a year by lightning,” said Mr. Roegner.

When Alcoa salespeople and engineers make a pitch to the people who design airplanes and must choose materials to buy for Boeing Corp. or Airbus, they now offer a portfolio that includes all kinds of metals. “Our job is to help our customer develop the best solution,” said Mr. Roegner. “Carbon fiber, nickel, aluminium, we’ll do it all,” he said.