Aluminum Demand Makes for an Alcoa Opportunity

For my money, and despite falling a penny short of its per-share income expectations, Pittsburgh-based Alcoa (NYSE: AA  ) Monday led off earnings season for the major companies with one of the city's strongest performances since "Mean" Joe Greene moved from the Steelers to participating in memorable soft-drink commercials.

For the quarter, the nation's biggest aluminum producer recorded income from continuing operations of $364 million, or $0.32 per share, excluding $38 million of costs related to restructuring and debt tender offer costs. In the same quarter a year ago, its comparable results were $137 million, or $0.13 per share. Revenues for the most recent quarter were $6.6 billion, a 27% increase from the second quarter of 2010.

Three of Alcoa's four segments checked in with solid growth in after-tax operating income. Alumina's $186 million ATOI amounted to a 31% year-over-year increase, while Flat-Rolled Products were up 32% to $2.1 billion, and Engineered Products and Solutions increased 22% to $1.37 billion. The $201 million recorded by Primary Metals was flat versus a year-ago, as energy and raw-material costs, along with a negative currency impact, offset higher prices and production.

As CEO Klaus Kleinfeld noted: "Although the economic recovery is uneven, the overall outlook for Alcoa -- and for aluminum -- remains positive. Demand for aluminum continues to rise, and so does growth in our major markets." He also reiterated an expectation of 12% growth for aluminum demand this year, followed by a doubling by 2020.

And despite the wobbly economy, all of Alcoa's end markets achieved sequentially higher revenues in the quarter. Indeed, revenues generated by commercial transportation, packaging, and building and construction all grew by double digits. At the same time, the automotive, industrial gas turbines, and industrial products markets increased their top-line contributions by 5%, 8%, and 9%, respectively.

You won't be surprised to know that China continues to lead the parade of nations in aluminum production and demand. According to Kleinfeld, the country will turn out about 18.35 million metric tons during 2011, versus a demand of 19.1 million tons, making for a 750,000-ton shortfall.

We'll gain an even firmer grip on the outlook for aluminum when Alcoa's smaller brethren, Kaiser Aluminum (Nasdaq: KALU  ) and Century Aluminum (Nasdaq: CENX  ) , report their results on July 27 and Aug. 4. At the same time, with rising copper prices increasingly resulting in the substitution of aluminum for the red metal, it's sensible to also monitor the results and forecasts of Freeport-McMoRan Copper & Gold (NYSE: FCX  ) on July 21, and Southern Copper (NYSE: SCCO  ) four days later.

In the meantime, since the market appears less than enthralled by Alcoa's solid lead-off results, I intend to redouble my attention to the big aluminum producer. Why not join me by simply placing the company's name on your individual version of My Watchlist?

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We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Fool contributor David Lee Smith doesn't own shares in any of the above-named companies. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 13, 2011, at 5:15 AM, Brettze wrote:

    will all aluminium Harleys be in store for Harley buffs ?

  • Report this Comment On July 13, 2011, at 5:21 AM, Brettze wrote:

    Concentrated solar power may boost aluminium demand in the future if the latest advances made is commercialized. The existing solar thermal technology that utilizes glass lining over aluminium reflectors is considered too uneconomical. ALCOA had recently completed testing on its advanced solar parabolic trough at National Renewable Energy Laboratory last year and is moving toward commercialization. ALCOA is doing away with glass lining because ALCOA is employing its patent known as Durabright that is now used to make wheels for heavy trucks with more than three axles. Durabright is a tough shiny surfacant that make aluminium so highly reflective as well as very easy to clean with mild soap and water. It is a major breakthrough that also finds the way to concentrated solar power. Photovoltaics will be displaced by CSP as the leading technology for solar energy in the future.

  • Report this Comment On July 13, 2011, at 5:22 AM, Brettze wrote:

    I wonder what China is making with 18 millon tons of new aluminium? I am sure that not all goes to Coke and Pepsi cans ...

  • Report this Comment On July 13, 2011, at 5:27 AM, Brettze wrote:

    I just read an article that China is already beginning to import aluminium , finally after years of rapidly expanding its own aluminium smelting capacity on top of aging capacities. The reason China is begining to import aluminium is probably owed to the fact that aluminium can be a substitute for copper wiring to save weight and cost. so China will probably reduce copper imports as it switches to aluminium substitutes. Things are moving so fast that analysts like you can not keep up ...

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