Why aluminium firms are on fire despite Alcoa’s poor show

Even though the world’s largest aluminum maker, Alcoa, posted quarterly losses for the first time in two years, global markets welcomed the results and moved higher. Indian markets too followed suit and are trading in the green.

For the fourth quarter the company posted a loss of $193 million or $0.18 per share due to poor demand and lower prices, However, after adjusting restructuring charges, the loss works out to only $34 million or $0.03 per share. Sales on the other hand grew 6 percent over the year-ago period, but were down 7 percent over the sequential quarter.

Despite this loss, markets are buoyed by the company’s supply and demand projections for the commodity in 2012.

The company forecasts a 7 percent growth globally for alumunium as a commodity in 2012, especially in the aerospace and automobile segment. This growth, however, is lower than the 10 percent achieved in 2011 (Alcoa had projected a growth of 10 percent at the start of 2011) and around half of what was achieved in 2010.

Aerospace market is expected to grow in the range of 10 and 11 percent, while automobile will be in the range of 3 and 8 percent. Commercial building and construction is expected to grow at a rate of 5 percent.

The aluminium maker expects no growth from Europe, where consumption was almost negative in 2011, whereas it expects demand to fall in North America to 3 percent in 2012 from 6 percent in the year-ago period.

However, Alcoa results is a positive signal for aluminium makers in India and China, where demand growth is expected to sustain at 10 and 12 percent, respectively.

On the supply side most of the new capacities are being added in China which will take new additions higher by 4.45 million tonnes in 2012, of which 3.75 million tonnes will be in China alone. In the fourth quarter of 2011, global inventory of primary aluminium was 9.8 million tonne. New capacity under normal circumstances would have a negative impact on prices as it means that supply would be greater than demand.

However, Alcoa says that around 32 percent of Chinese smelters are expected to shut down as they are unviable at current rates. This tilts the equation from alumunium being a surplus commodity in 2011 to that of a deficit one in 2012. There is likely to be a deficit of 0.65 million tonnes of aluminium in 2012. Hence, this would lead to situation where demand would exceed supply, resulting in rebounding of prices. Expectation of a deficit situation post Alcoa results led to aluminium prices rising by 2.5 percent in London Metal Exchange (LME) on Tuesday.

In India too, share price of aluminuim companies are trading higher on the stock exchange. While Hindalco is up 4.88 percent to trade at Rs 129, Sterlite has gained 4.07 percent at Rs 99.75 in anticipation of better performance by the sector.