Alcoa offers little hope for Geelong smelter despite return to profit

ALCOA left the future of 600 jobs at its Point Henry aluminium smelter in Geelong hanging despite reporting a surprise first-quarter profit in the face of depressed metal prices.

Addressing analysts in the US for the group's March quarter profit report, Alcoa chairman and chief executive Klaus Kleinfeld gave the Geelong workers little reason to be hopeful the smelter would continue beyond June.

The US aluminium giant is the managing 60 per cent partner in the ageing smelter, with Melbourne-based Alumina holding the remaining 40 per cent.

Alcoa has responded to the collapse in aluminium prices to less than $US1 a pound by slashing its global aluminium production by 530,000 tonnes annually.

“And by the way, I mean the 530,000 tonnes that we have taken off line may not be the end. I mean we continue to look at our Point Henry smelter in Australia, which is very high on the cost curve for a whole host of reasons,'' Mr Kleinfeld said.

Apart from the collapse in metal prices, the Point Henry smelter has also had to deal with the revenue-sapping effects of the strong US exchange rate, increased labour costs and rising energy costs.

Alcoa said in February that it would review the future of Point Henry. It said that its aim was to keep Point Henry open, but that it may shut down production if profitability targets were not met. The review is set to last until the end of June, when a final decision will be made.

"A combination of factors, including metal prices, input costs and exchange rates, have resulted in the Point Henry smelter becoming unprofitable," Alcoa said at the time, without disclosing the size of the losses.

Mr Kleinfeld's latest comments on Point Henry followed the announcement overnight in the US of the group's $US94 million ($91.4 million) profit for the first quarter of the year. While better than the loss the market was expecting, it was still substantially down from the $US308 million profit made by Alcoa in the previous corresponding period.

The improvement from a $US191 million loss in the preceding fourth quarter of 2011 was put down by Alcoa to “strong productivity improvements across all businesses, higher realised prices for aluminium and improved volume and mix”.

“These were offset somewhat by a lower realised alumina price and higher input costs,'' Alcoa said.

Alumina does not report on a quarterly basis but its chief executive John Bevan said that “challenging market conditions continued during the quarter with headwinds from lower aluminium and alumina prices and the stronger Australian dollar”.

“These headwinds were partially offset by continued productivity gains which was pleasing. Going forward, AWAC (the 60:40 joint venture managed by Alcoa) will reduce its annual alumina production capacity in the Atlantic region by around 4 per cent (2 per cent of AWAC's global capacity) to reflect prevailing market conditions,'' Mr Bevan said.

Alumina's only cash flow is the dividends that it receives from AWAC. It received fully franked dividends of $US26 million for the March quarter.

Alumina did not get a dividend in the preceding December quarter and got $US66 million in the September 2011 quarter.

Credit Suisse said that the Alcoa first-quarter result implied poor earnings for Alumina.

Alcoa's results are not directly comparable to those eventually posted by Alumina but Credit Suisse said its attempted “read-through” for Alumina was for a loss of $US16 million in the first quarter.