Metals price dive brings earnings gloom

NEW YORK Mon Oct 10, 2011 5:26pm EDT

Smoke spews from a steel plant in Kisarazu, east of Tokyo October 3, 2011. REUTERS/Issei Kato

Smoke spews from a steel plant in Kisarazu, east of Tokyo October 3, 2011.

Credit: Reuters/Issei Kato

NEW YORK (Reuters) - Global economic concerns have sparked a precipitous drop in metals prices in recent months, which will likely result in dismal quarterly profits for mining companies and steelmakers.

Stagnant economies in developed countries are crimping demand for metals such as aluminum, used in making cars and aircraft, and for copper, used in electrical wiring for new buildings. Steel, too, is seeing weak demand from the construction industry, which accounts for half its business.

That lack of demand has driven metals prices down. During the third quarter ended September 30, copper futures in New York lost more than a quarter of their value -- the biggest quarterly decline since the 2008 fourth quarter.

In the past week, Wall Street analysts have lowered their consensus earnings estimates for America's biggest aluminum producer Alcoa Inc (AA.N) and for Freeport-McMoRan Copper & Gold (FCX.N), the world's largest publicly traded copper miner.

Amid all the economic doom and gloom, Freeport could be among the hardest hit this quarter.

Charles Bradford of Bradford Research warned that Freeport-McMoRan could come in a lot lower than Wall Street expectations, given the slump in copper prices and strikes at two of its big mines in Indonesia and Peru.

"That could take a big, big hit," Bradford said of Freeport's earnings. "It's not something they did wrong, but the copper price plummeted when the dollar rallied."

Any 5 cent change in the copper price equates to $14 million on Freeport's bottom line, Bradford said.

Last week, analysts expected Freeport's third-quarter profit to be $1.20 per share. By Monday the consensus estimate had dropped to $1.17, down from the second quarter's $1.49 and last year's third-quarter profit of $1.25.

Freeport shares dropped 42 percent during the third quarter.

Copper prices, meanwhile, remain pinned below the $7,000 per metric ton level and Bank of America Merrill Lynch has forecast a price below $5,500 in the months ahead.

ALCOA TO PROVIDE WINDOW ON DEMAND

Aluminum prices have suffered too, falling almost 20 percent in the quarter, while flat-rolled steel prices have fallen since April. Alcoa's share price fell 41 percent during the same period.

The market will find out just how weak demand is after the close of trading on Tuesday when Alcoa is set to report results.

(For a Reuters Insider look at an expected earnings miss by Alcoa click on reut.rs/pFUQCw )

Bridget Freas, an analyst with Morningstar Inc who tracks Alcoa as well as U.S. steelmakers, expects the third quarter to be weak, "but it remains to be seen if it will be a blip or a downward trend."

Freas said the lowered Wall Street consensus estimates for Alcoa's third-quarter earnings come as no surprise.

"With the exception of aerospace, Alcoa is experiencing a slowdown in all end-markets on macro concerns," she said. "Right now a lot of buyers are sitting on the sidelines till they get a sense of where the economic growth will come."

Tony Rizzuto of Dahlman Rose & Co cut his earnings estimates and stock price target for Alcoa.

"Although many do not believe that the economy is entering another 2008/2009-type recession, buying patterns have certainly been altered," he wrote in a research note. "Customers are more wary of building inventory in a declining price environment."

A week ago, analysts on average were expecting Alcoa's third-quarter profit to be 26 cents a share, according to Thomson Reuters I/B/E/S. On Monday, the consensus dropped to 22 cents per share, better than 9 cents in last year's third quarter, but well below the second quarter's 32 cents.

Overall, the materials sector of the S&P 500 is expected to show year-on-year earnings growth of nearly 30 percent, according to Thomson Reuters data.

Bradford said Alcoa's profit could be in single digits in the fourth quarter.

"It's a cyclical industry and prices are down because of (lack of) demand and the dollar, neither of which Alcoa can do anything about."

Bradford said he was pessimistic for all metal and steel companies reporting in the coming weeks.

"They will generally be weaker than the second quarter, but the fourth quarter could be worse," he said.

SOFT EARNINGS SEEN FOR STEEL

U.S. steelmakers' profits are likely to feel the same pain. Third-quarter results are expected to be well below second-quarter levels, Bradford said, "and a couple could be unprofitable."

AK Steel Holding Corp's (AKS.N) earnings estimate of 1 cent per share, was "barely in the black and business has weakened more than they expected," he said.

U.S. Steel Corp (X.N), which has high fixed costs, could see third-quarter profit drop sharply, he said.

Analysts currently expect U.S. Steel's third-quarter profit to be 56 cents per share -- half of the second quarter's $1.12, but still better than the loss of $1.20 it posted a year ago.

(Reporting by Steve James; editing by Andre Grenon)

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