Alcoa is trying, but aluminium price hard to overcome

Alcoa shares have declined by a third since February. And things could have been worse, had it not made the changes it did. The aluminium maker's strategy, pursued over the past several years, has two planks. First, it wanted to make its core "downstream" aluminium production business more efficient. Second, it has expanded its manufacturing of end products for aerospace, automobiles and other industries. The shift has won plaudits. Yet the company still cannot fully shake off the effects of an aluminium price that is down 15 per cent in eight months.

he production side of Alcoa mines bauxite to refine into alumina and smelts alumina into aluminium. The company has curtailed capacity and moved down the cost curve. And with the help of $US5 billion worth of recent acquisitions, its rolled and engineered products units make components that go into cars and jet engines.

First-quarter earnings were aided by strong results in its production businesses. But when Alcoa reports its second-quarter results today, a strong earnings forecast from its commodities units is unlikely. Not only have core aluminium prices slipped, the other component of prices - a charge for taking the metal out of storage - have dropped sharply as well. According to Morningstar, premiums have fallen 65 per cent this year.

Recently, the Russian producer Rusal said it would cut production this year to counteract soft prices. China, the world's biggest producer (and consumer), has, however, been ramping up aluminium exports, which has been a key cause of weak pricing. If the stock market weakness there leads to economic weakness, that will put more pressure on the commodity price.

In the meantime, earnings estimates for Alcoa have come down a quarter this year, slightly less than its share fall, so its valuation multiple has inched up. The transformation is working as far as it can. It cannot prevent Alcoa from being an aluminium company.