Alcoa signals better times for aluminium producers in 2012

Alcoa Inc.’s results may at first alarm investors in aluminium firms. It reported a loss of $193 million (Rs. 1,007 crore today), the first since 2009, due to weaker demand, lower prices and rising costs. Restructuring costs contributed a large chunk, arising from the company’s decision to shut unviable plants; the loss would have been $34 million excluding these costs. Falling realizations and rising costs have been a bugbear for metal companies. Alcoa’s sales fell 6.7% sequentially in the December quarter, but its cost of goods sold fell by just 1.2%, leading to the cost of goods sold as a percentage of sales rising by nearly 5 percentage points.

Prices have been falling due to worries on the demand front, and jitters in the financial market. Global demand for aluminium fell in the second half of 2011, as Europe’s problems came to the fore. In 2011, Alcoa had forecast aluminium consumption would grow by 12%, but actual growth is estimated to have been lower at 10%. Europe managed to barely keep its head above water, with consumption rising 1%. India did well to grow at 10%, while China grew 15%.

In 2012, the company is projecting consumption to rise by just 7%, much lower than in 2011 and nearly half the growth of 13% seen in 2010. It expects consumption in Europe to be flat, but expects India to sustain 10% demand growth (which appears optimistic) and China to grow 12%. Its assessment of key end-markets shows a decline in beverage can packaging in North America, and a decline in the automobile and heavy truck/trailer sectors in Europe, while both these regions are expected to see a decline in commercial building/construction activity. But globally, these markets are expected to grow, primarily due to China and other emerging markets. Here’s where a glimmer of hope appears.

In 2011, the primary aluminium market was in surplus by about 150,000 tonnes. Ordinarily, 2012 would have seen this worsen, as 4.45 million tonnes of new production will enter the market, 84% of it in China. But as per Alcoa forecast, global production cuts will take away 1.8 million tonnes from the system, with 61% of that accounted for by China, where nearly one-third of aluminium production is unviable at current prices. The net result is that supply will increase by only 6%, leaving a deficit of 600,000 tonnes. Alcoa believes that this sets the stage for a rebound in pricing, especially if the macroeconomic hangover on prices dissipates.

Along with product prices, input costs, too, have been falling, which should reflect in lower costs in future quarters. Alcoa’s results confirm that Indian companies, too, are likely to report weak numbers in the December quarter. Going forward, slower-than-expected demand growth, volatility in foreign exchange rates and slower domestic economic growth are key risks. But the firm’s estimate of a tight market for aluminium in 2012 is the first hint of a better year for producers.