Alumina may still prevail when market conditions normalise

ALUMINA'S buddy Alcoa is sticking to its forecast of 7 per cent growth in global aluminium demand this calendar year, in ?essentially balanced'' alumina and aluminium markets.

This is despite lower prices for the finished metal and the general industry funk.

In fact Alcoa's downstream operations (engineered products) are generating record profitability, which is no mean feat in that the value-add operations account for 57 per cent of Alcoa's total revenues.

Kicking off the US reporting season, Alcoa overnight reported a second quarter loss of $US119 million (US11c a share). Excluding a $US195m one off (mainly relating to the closure of smelting assets) the business was profitable to the tune of $US195m.

Our businesses showed remarkable operating performance in the quarter with solid free cash flow,'' Alcoa chief Klaus Kleinfeld said, adding the giant had acted “decisively to defy the headwinds of falling metal prices in our upstream business.''

The Melbourne-based Alumina's (AWC, $1.022) reason for being is its 40 per cent stake in the AWAC global joint venture with Alcoa, which owns bauxite mining, alumina refining and aluminium smelting assets globally.

AWAC has alumina refineries in the US, Brazil, Suriname, Jamaica, Spain and Australia, accounting for around 15 per cent of global alumina capacity.

Commenting on Alcoa's results, Alumina chief John Bevan said despite a “tough'' quarter for aluminium prices, the spot alumina price remained relatively stable.

“The recent decline in the Australian dollar and Brazilian real (relative to the $US) is a positive development and, if sustained, will deliver financial benefits through lower production costs.''

The benefit of a declining $A can't be underestimated: on UBS numbers, every US1c decline improved AWAC's ebit by $US30m.

“However the aluminium price remains a headwind, struggling with oversupply and lack of production curtailments, despite 50 per cent of the industry making negative cash flow at current prices,'' he says.

We had Alumina as a spec buy at $1.01 on May 29 on the weakening currency thesis.

On balance, Alcoa's numbers don't exactly ring the bell on the current torrid conditions but it's vaguely encouraging that things haven't deteriorated further.

Alumina remains a spec buy on the assumption that AWAC's low-cost assets will prevail in more “normal'' conditions after a long-awaited industry shakeout.