The Wall Street Journal
Alcoa Report May Offer Bang, Not Bucks
Edited by : AL CIRCLE
2 min read
This earnings season could start with a bang. Unfortunately, it's of the unsettling kind.
Traditional season-opener Alcoa reports earnings Monday. And the aluminum company may well kick things off by reporting a fourth-quarter loss. As it is, analysts polled by Thomson Reuters expect Alcoa to report earnings of just one cent a share for the period, down from 21 cents a year earlier. Tumbling aluminum prices, industry oversupply and spotty demand—particularly in Europe—are to blame.
Indeed, this is why Alcoa last week announced it will idle about 12% of its global smelting capacity, incurring a roughly 15-cent charge in the fourth quarter. As Barclays Capital analyst David Gagliano said in a note, the move suggests Alcoa sees little chance of a turnaround in aluminum prices and few choices but to reduce production. And the cuts, which amount to 0.5% of global primary aluminum production, may not do much to ease the industry's supply glut.
It doesn't help that much of the supply is coming from China, where political pressures tend to trump market forces. More than three-quarters of China's smelters appear to have a cost of production higher than the current aluminum price, according to investment firm Dahlman Rose. They aren't alone; BarCap puts the global industry's cost of production at roughly $1.15 a pound, well above the spot price, which is in the 90-cent range. Trouble is, China's smelters are less likely to respond by immediately curtailing output.
That puts the onus on a company like Alcoa to help itself, although it is better prepared now than during the last global slump. As Dahlman analyst Anthony Rizzuto points out, Alcoa has reduced its debt load by $1.2 billion since 2009, has only $1 billion coming due over the next two years, and has $1.3 billion in cash on its balance sheet. Plus, while the global growth outlook isn't great right now, it isn't quite as dire as during the 2008-2009 period, either.
Alcoa's shares slumped after last week's announcement, but that may help take the sting out of Monday's report. Of course, the swing factor for Alcoa now, like so many companies, isn't what it says this week, but rather the next set of headlines from Europe. The Continent's debt crisis is likely to steal the thunder from earnings season yet again.
Traditional season-opener Alcoa reports earnings Monday. And the aluminum company may well kick things off by reporting a fourth-quarter loss. As it is, analysts polled by Thomson Reuters expect Alcoa to report earnings of just one cent a share for the period, down from 21 cents a year earlier. Tumbling aluminum prices, industry oversupply and spotty demand—particularly in Europe—are to blame.
Indeed, this is why Alcoa last week announced it will idle about 12% of its global smelting capacity, incurring a roughly 15-cent charge in the fourth quarter. As Barclays Capital analyst David Gagliano said in a note, the move suggests Alcoa sees little chance of a turnaround in aluminum prices and few choices but to reduce production. And the cuts, which amount to 0.5% of global primary aluminum production, may not do much to ease the industry's supply glut.
It doesn't help that much of the supply is coming from China, where political pressures tend to trump market forces. More than three-quarters of China's smelters appear to have a cost of production higher than the current aluminum price, according to investment firm Dahlman Rose. They aren't alone; BarCap puts the global industry's cost of production at roughly $1.15 a pound, well above the spot price, which is in the 90-cent range. Trouble is, China's smelters are less likely to respond by immediately curtailing output.
That puts the onus on a company like Alcoa to help itself, although it is better prepared now than during the last global slump. As Dahlman analyst Anthony Rizzuto points out, Alcoa has reduced its debt load by $1.2 billion since 2009, has only $1 billion coming due over the next two years, and has $1.3 billion in cash on its balance sheet. Plus, while the global growth outlook isn't great right now, it isn't quite as dire as during the 2008-2009 period, either.
Alcoa's shares slumped after last week's announcement, but that may help take the sting out of Monday's report. Of course, the swing factor for Alcoa now, like so many companies, isn't what it says this week, but rather the next set of headlines from Europe. The Continent's debt crisis is likely to steal the thunder from earnings season yet again.
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