Alcoa Inc (NYSE:AA)’s decision to review 460,000 metric tons of smelting capacity over the next 15 months for possible closure is the right move according to analysts at Deutsche Bank Markets Research citing weak prices of aluminum, which has fallen by 33 percent from its peak in 2011.
Deutsche Bank Markets Research analysts, Jorge Beristain, Wilfredo Ortiz, David Martin cited that the possible closure of 11 percent of the aluminum giant’s smelting capacity will help improve its financial performance next year.
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The analysts estimated that Alcoa Inc (NYSE:AA)’s EBITDA for fiscal 2014 might increase by 3 percent to ~$97 million and its diluted earnings per share could improve by 9 percent to $0.09 with the assumption that the company will close all of its targeted facilities, discounting one-time closure charges. The analysts also cited that the company’s 5.2 million tons of exchange-held aluminum inventory and new capacity build remain as headwinds.
In a note to investors, Beristain and his fellow analysts wrote, “We laud Alcoa for taking renewed leadership in an over supplied industry and would hope other competitors could follow suit.”
Alcoa Inc (NYSE:AA) plans to evaluate its higher-cost plants and facilities with long-term risk due to energy costs and regulatory uncertainty. The aluminum giant has 568,000 metric tons or 13 percent of its smelting capacity is currently idle.
Chris Ayers, president of global primary products of Alcoa Inc (NYSE:AA) said, “Because of persistent weakness in global aluminum prices, we need to review every option to maintain Alcoa’s competitiveness. Any action taken will only be done after a thorough strategic review and consultations with stakeholders.”
The management of Alcoa Inc (NYSE:AA) will consider different alternative actions in its evaluation for the possible curtailment of its smelting capacity including discontinuing pot relining to full plant curtailments or permanent shutdowns. The management will also review its alumina refining system to reflect any curtailments in smelting and the existing market conditions.
Alcoa Inc (NYSE:AA) said the review of its primary metals operation is consistent with its 2015 goal of reducing its position in aluminum production worldwide to lower its production cost by 10 percent and alumina costs by 7 percent. Its decision regarding closures or curtailments will be announced after completing its review.
The analysts commented, “We interpret this as another (significantly more capital-efficient way) that Alcoa Inc (NYSE:AA) may be able to meet its stated goal of moving down the global cash cost curve by 10pp instead of simply plowing more capital into underwater smelters to lower their costs.”
According to the analysts, the impact of the curtailed capacity under review will not be realized until its 2014 financial results and beyond. They also cited that its impact in the world supply is small (~1% of 2012’s 47.9 million ton global aluminum production).
They estimated that the company’s aluminum sales volume in 2014 will be lower by 16 percent than their present estimates and closer to 2.5 million tons assuming the implementation of gradual curtailments starting 3Q 13. They also projected that Alcoa Inc (NYSE:AA) smelting cash costs might improve by ~4% percent versus DBe.