Alcoa Earnings Watch: All Eyes on Aluminum and China

Alcoa Earnings Watch: All Eyes on Aluminum and China

Alcoa Inc. (NYSE:AA) officially kicks off the Third Quarter earnings season this Tuesday. Investors will be watching the company for signs of how the overall economy is performing. One area in particular that investors will be eyeing is aluminum numbers. Aluminum is used in various products, and China is the world’s largest aluminum producer. Investors will be looking to see whether China is experiencing a soft or hard landing. A quick look at the aluminum industry and how the commodity will impact Alcoa Inc. (NYSE:AA)’s earnings.

Alcoa Earnings Watch: All Eyes on Aluminum and China
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Aluminum Price and Inventory Situation

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The global aluminum market remains oversupplied with exchange inventories sitting at 5,458k tonnes, a 5.3% increase vs where it began at the beginning of the year at 5,178k tonnes. At the end of August, global aluminum producer inventories totaled 2,390k tonnes down 10.2% YoY but up 2.0% MoM.

Global Surplus/Deficit

Alcoa Inc. (NYSE:AA) should provide updated projections for 2012E China and global surplus/deficits for alumina and aluminum. At the end of 2Q, Alcoa projected a 515k tonne global aluminum deficit in ’12 and a balanced global alumina market. The Citi commodity team forecasts a global aluminum surplus of 742k tonnes in ‘12 and a 717k tonnes surplus in ’13.

Analysts expect Alcoa Inc. (NYSE:AA) to report adjusted diluted EPS of -1c-1c vs 6c in 2Q12 primarily due to ~5c/lb QoQ decline in realized aluminum prices to $1.01/lb. Lower realized prices expected to be driven by ~7c/lb lower QoQ LME aluminum price to 85c/lb (@ 15 day lag) partly offset by +2c/lb QoQ gain in aluminum premia to record 15c/lb levels. Our 3Q12E EPS is in-line with FactSet consensus (-2c in
past month).

On October 2nd, Alcoa Inc. (NYSE:AA) informed it expects a charge of ~$85m (~8c/share) in 3Q12 related to environmental clean-up of a river near one of its US smelters, with outlay expected during 2016-20. Charge implies reported diluted EPS closer to loss of 7c, but as charge would be excluded from Alcoa’s headline EPS.

3Q12E corporate EBITDA estimated at $498m (-4% QoQ)

Alumina sales forecast at 2.3m tons (+83k tons QoQ), with price decline to $317/ton (-7% QoQ) as 66% of volumes priced on 2-month lagged aluminum price-link formula/ 34% spot-exposed, while cash cost likely at $277/ton (-2%) benefiting from normalization of maintenance costs.

This is just a brief preview. We will be providing more in-depth coverage on Tuesday.

Disclosure: No position