CORRECTED - Alcoa sees higher alumina prices helping Q2 profit

Tue Apr 12, 2011 12:02pm EDT

(in April 11 story, corrects name of Chief Financial Officer Chuck McLane in paragraph 2 and throughout)

By Carole Vaporean

NEW YORK, April 11 (Reuters) - Aluminum giant, Alcoa Inc (AA.N), which reported a first-quarter profit that beat estimates on Monday, benefited in part from higher alumina prices, as well as increased demand for flat-rolled products that is expected to continue into the second quarter.

Chief Financial Officer Chuck McLane told Wall Street analysts on a conference call that the quarterly increase in revenue came primarily from a 7 percent gain in alumina and a 17 percent rise in flat-rolled products.

Year-over-year results showed operating income for alumina jumped 97 percent and flat-rolled products by 170 percent, with higher demand in most end markets, and improved pricing and mix helping the segment.

Despite Alcoa's lower output of alumina, used in the production of aluminum metal, which dipped slightly in the first quarter to 4.0 million metric tons from 4.2 million in the fourth quarter of 2010, prices rose. [ID:nN1199754]

(For a graphic on Alcoa's earnings click on r.reuters.com/sub98r)

For alumina, which is made from raw material bauxite and refined into aluminum metal, McLane said prices for third-party transactions rose by 15 percent in the quarter.

Looking to the second quarter, the CFO said the company will increase alumina production by 125,000 tonnes, and higher pricing should continue to contribute to Alcoa's profits.

Chairman and Chief Executive Officer Klaus Kleinfeld emphasized several times on the call that Alcoa's goal to continue switching its pricing method for its alumina contracts to an index based on the spot market was on target.

He said 20 percent of its alumina business was already being conducted either through contracts priced against a spot index or in the spot market itself.

For over two decades, third party or independent aluminum smelters generally bought their alumina supplies through multi-year contracts with the price set as a percentage of the London Metal Exchange aluminum metal price.

But last year, lead by Alcoa -- the world's largest alumina producer -- long-term contracts for the material have moved to using a spot market index as its basis.

Kleinfeld said it still aims to have all of its contracts switched to a spot index pricing by 2015, with about 20 percent of the contracts coming due each year.

"We are not concluding any alumina contracts that are not based on either the index or spot. We have traditionally always kept a bit of our volume in the spot market and we will continue to do that," the CEO said, in answer to a question.

He added that Alcoa does not mind if its spot business increases somewhat as a result, "because it comes down to more frequent pricing."

As long as the alumina price continues to rise that helps Alcoa's bottom line.

Last quarter, McLane said Alcoa benefited from alumina prices with its outstanding contracts based as a percentage of the London Metal Exchange aluminum price going up with the metal price and as the spot price went up.

Otherwise, Kleinfeld said, Alcoa's strategic goal is to move its alumina business down the cost curve to the 23rd percentile by the end of 2015 from the 30th currently.

"Everything we're doing from changing our pricing method to increasing volume at our Suriname and Point Comfort refineries has an impact on 2011 alumina profitability," he said, as the company's profit margin for alumina is expected to rise to $71 a tonne from the 10-year average of $66 a tonne.

The aluminum producer projects 2011 alumina supply and demand will be balanced for both China and the West. (Reporting by Carole Vaporean; Editing by Bernard Orr)

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