TORONTO Alcoa Inc (AA.N), the largest U.S. aluminum producer, still sees global demand for aluminum products growing 7 percent this year, signaling a potential price rise for the metal as bulging Chinese aluminum inventories begin to dwindle.
The solid demand, driven by the aerospace and commercial transportation sectors, should combine with industry-wide production cuts already in place to reduce a supply glut that has driven down aluminum prices by 13 percent this year.
Alcoa on Monday affirmed its demand forecast, even as it posted a net loss in the second quarter, due to restructuring costs related to plant closures.
On an adjusted basis, it achieved a larger-than-expected profit thanks to productivity gains and a strong performance from its engineered products business, which makes high-margin goods like aerospace fasteners, turbine blades and truck wheels.
"It was a good, solid quarter. Alcoa continues to show they can cut costs and will be a survivor," said Tim Ghriskey, chief investment officer of Solaris Asset Management, which owns some Alcoa bonds. "This is a company that remains profitable and strong despite the tough environment."
Shares of Alcoa, which closed at $7.92 on the New York Stock Exchange shortly after the results, were little changed in trading after the closing bell.
The stock has fallen nearly 9 percent this year in the face of stubbornly low aluminum prices, caused by a global surplus, and concerns about lackluster demand.
Alcoa expects a 9 to 10 percent increase in aluminum demand this year from the aerospace sector, driven by a recent flurry of aircraft orders at the Paris Air Show and an already-large backlog of orders within the aerospace industry. It also sees increased demand from the automotive, commercial transportation and construction industries.
INDUSTRY CHALLENGES WEIGH
But while Chinese stocks have fallen, stockpiles in London Metals Exchange-registered facilities rose to a record-high above 5.45 million tonnes at the end of June. This means that aluminum prices are not likely to stage a major rally anytime soon despite industry-wide production cuts.
Alcoa reported a loss from its aluminum smelting business, and said roughly a third of global aluminum is still produced at a loss, despite offsets from record high premiums above LME-prices, which end-buyers pay to take delivery of the metal.
"The primary (business) lost money in the quarter and that is symptomatic of the industry as a whole," Alcoa Chief Financial Officer William Oplinger told a conference call.
The London three-month aluminum price fell nearly 7 percent during the quarter ended June 30 and has tumbled around 13 percent in 2013. Aluminum touched a nearly four-year low late last month of $1,758 a tonne.
Given the plight of the aluminum industry, Alcoa's results are no longer viewed as a proxy for economic growth, but its quarterly results are still closely watched as they mark the unofficial start of the North American earnings season.
A component of the Dow Jones Industrial Average for more than 50 years, Alcoa is now by far the smallest company in the index. Its stock price has fallen more than 10 percent over the last 12 months, while the Dow has risen roughly 18 percent.
Excluding the impact of restructuring costs and costs tied to a racketeering and fraud probe, the company reported second-quarter earnings of $76 million, or 7 cents a share. Analysts had been expecting earnings of 6 cents, according to Thomson Reuters I/B/E/S.
Quarterly revenue fell 2 percent to $5.85 billion, largely because of lower aluminum prices, but still topped analysts' expectations of $5.83 billion.
"It looks much better than expected. It is good to see that revenue is better than expected," said Alan Lancz, president of Alan B. Lancz & Associates, an investment advisory firm based in Toledo, Ohio. "It seems like the outlook is favorable so far."
The company said its net loss in the quarter ended June 30 was $119 million, or 11 cents per share. That compares with a loss of $2 million, or break-even per share, a year earlier.