Alcoa kicking off tough earnings period for miners
By Steve James
NEW YORK, Oct 5 (Reuters) - Aluminum producer Alcoa Inc (AA.N) kicks off the U.S. earnings season this week with Wall Street scrambling to lower expectations for mining companies after a quarter in which base metals prices fell precipitously and turmoil roiled the financial markets.
Many analysts have reduced earnings estimates for the rest of 2008 and 2009 and cut price assumptions for copper, aluminum and other metals that had soared over the last five years on economic growth in China and other developing countries.
"Unprecedented developments in the financial markets are likely to have profound ramifications for the global economy," Anthony Rizzuto of Dahlman Rose & Co wrote in a research note.
"We have analyzed an alternative scenario, i.e. a stress scenario, to evaluate what effects a slower growth macroeconomy might have on the industries and companies we cover, including the global aluminum, copper, and steel industries."
Rizzuto said production cuts are necessary and likely.
In a note entitled: "Commodity forecast climb-down," John Hill, of Citi Investment Research, cut forecasts for 2009-10 "to reflect China slowdown, disinflationary developments, and the short/medium term impacts of the U.S. financial crisis."
He cut 2009 metal price forecasts by 20 percent as a result of slower demand growth. "We remain most positive on the coal markets and copper; negative on nickel and zinc."
During the third quarter, the price of aluminum fell 28 percent and the price of copper dropped nearly 32 percent.
Analysts say prices may fall further as the credit crisis raises concerns about global demand, depresses commodity prices in general and crimps earnings outlooks for mining companies.
Goldman Sachs cut Alcoa's investment rating to neutral from buy, citing the drop in metal prices, and Desjardins Securities cut Alcoa's stock price target from $44.70 to $28.30. Alcoa closed at a 52-week low of $19.24 on the New York Stock Exchange on Friday.
"We had previously expected 'anemic' growth in metal demand for both Europe and the U.S." said a Desjardins note. "Now we expect metal demand in those two regions to remain below 2006 levels."
It revised its metal market forecasts and lowered earnings and price forecasts for most of the stocks it covers.
In this climate, Alcoa will announce its third-quarter results on Tuesday -- numbers that are traditionally viewed as a bellwether of the earnings season as a whole.
Analysts polled by Reuters Estimates on average are expecting profit of 56 cents per share, which is only one cent higher than the third quarter of last year. That consensus estimate on Friday had dropped from 58 cents on Wednesday. The analysts also expect revenue in the quarter of $7.21 billion - down from $7.39 billion a year earlier.
Analyst Charles Bradford of Bradford Research/Soleil, who is expecting 45 cents per share, said one analyst had recently dropped his Alcoa estimate from $1.10 to 46 cents.
"The metal price is weak, and costs of energy and caustic soda are up," said Bradford. "Plus, there's a $48 million hit from closing Rockdale."
Last week, Alcoa said it was curtailing aluminum production at its Rockdale, Texas, smelter and would lay off approximately 600 workers. It would take a $48 million charge for the cost of the layoffs in the third quarter.
Brett Levy, a high yield analyst at Jefferies & Co. does not see the climate improving soon for the miners. "We're going through a period of declining prices. Whenever you withhold credit, people do less business, they make less stuff.
"It's not going to be good until people are ready to lend again, until banks are healthy again," said Levy.
He said the credit crunch will affect the miners' bottom line and some companies will be financially constrained, sparking a possible wave of acquisitions. "Some guys are on the cusp of survival. If companies are on the verge of running out of money there is no shortage of people to scoop them up." (Editing by Leslie Gevirtz and Kenneth Barry)
