Alcoa scales down aluminium deficit estimate for 2012

Alcoa Inc.’s March quarter results provide clues to the performance of Indian aluminium firms in the quarter and the outlook in the forthcoming quarters. The company benefited from better aluminium realizations, which were up by 2.5% sequentially, but alumina’s realizations were down 8.5%. Alumina is an intermediate product that is processed further to get aluminium.

Higher input costs continue to dog Alcoa’s performance, but it wrung out sizeable productivity gains, allowing it to post a better-than-expected profit of $94 million (around Rs. 483 crore today) from continuing operations. It had posted a loss of $193 million in the previous quarter.

Since domestic firms’ product pricing is linked to international prices, companies such as Hindalco Industries Ltd, National Aluminium Co. Ltd and Sterlite Industries (India) Ltd are likely to see a similar effect in their results, adjusted for foreign exchange fluctuations. Rising costs have been a problem for Indian companies, too, chiefly energy costs.

More important is Alcoa’s outlook for the sector. After its 2011 results, the company had projected global aluminium consumption to grow by 7% in 2012. That outlook remains, but how it arrived at that figure has changed. China’s growth projection has been scaled down to 11% from 12%, while that of Asia, ex-China, and rest of the world has risen. Europe is expected to be flat, compared with a slight contraction earlier.

But a revision in the projected demand-supply balance does not spell good news. The projected deficit in aluminium has been scaled down to 435,000 tonnes from 600,000, mainly due to higher-than-expected production in China. And alumina is projected to be in surplus of one million tonnes, while earlier demand was expected to match supply. But the rest of the world, and not China, is to blame for the surplus. Earlier expectations that higher-cost aluminium production in China will go off the market are being belied.

One area where Alcoa has benefited is the global rolled products division, where its Ebitda per tonne rose by 16% year-on-year. Ebitda is income before interest, taxes, depreciation and amortization, an indicator of a company’s profitability.

Hindalco’s Canadian subsidiary Novelis Inc. sells rolled products globally, and it should also report good results, going by Alcoa’s numbers. It recently announced a new plant in China to supply rolled products to the automotive industry, joining others such as Alcoa to cater to growing demand in the region.

Indian companies have other worries: slower economic growth and high interest rates. They should get some relief on the energy front, as thermal coal prices have softened. Fears of slower economic growth in China have weighed on non-ferrous metal prices, and the lowering of the demand-supply deficit will be another negative factor.

If Alcoa’s results are any indication, then its ability to sell value-added products and improve productivity seem to be the main factors that can contribute to a better performance.