HardAssetsInvestor

Written by Julian Murdoch  |

April 09, 2009

Alcoa, Aluminum And You

Details

• Can the industry shrink itself to greatness?
• China ramping up
• Little agreement from analysts

Losing money is always bad, but in the case of commodities companies, it hasn't exactly been unexpected. Analysts expected Alcoa (NYSE: AA) to lose $0.56 per share. Instead, Alcoa reported a loss of $0.59, or $480 million, excluding one-time items. Given the state of the aluminum market, nobody should have been surprised.

Market Status

Demand for alumina – what aluminum is made from – as well as aluminum is in the dumps, along with everything else in the global economy. And of course, with demand, aluminum prices have crashed.

From Alcoa:

According to Alcoa's first-quarter report, LME Aluminum averaged $1,359 per tonne during the first quarter – down 25% from the fourth quarter of '08, and down 50% from 1Q08. LME Aluminum is now 57% off of the record price it hit in July 2008. Inventories are high as well, with over 3.5 million tonnes of the metal in LME warehouses as of yesterday.

In response to falling demand and rock bottom prices, aluminum companies across the world have tried to quickly cut production, both to cut costs, but also to hopefully correct the demand/supply balance.

Alcoa has cut 752,000 metric tons of production – or approximately 19% of its 2008 output. There are an additional 100,000 metric tons in production cuts planned on the books. Aluminum Corporation of China Limited, or Chalco (NYSE: ACH), has also made huge production cuts – 570,000 metric tons, or almost 25% of its 2008 production, according to the data in Alcoa's report. A somewhat conflicting but equally dire report by Sanford C Bernstein put the number closer to 45% idle capacity.

But Is It Far Enough?

Alas, it may be impossible for the aluminum industry to shrink itself to greatness this time around.

A report from Platts on March 23 suggests even more slashing is needed. Macquarie Research piled on:

Here's a table of those substantial cuts from Macquarie Research: