Alcoa Inc. says it will slash its global aluminum smelting capacity by 12 per cent as the sputtering global economy sends prices for the metal plummeting.
Alcoa, the largest U.S. aluminum maker, said it plans to close or curtail about 531,000 tonnes of capacity to help improve profit margins and stay competitive.
Prices for metals and other commodities have tumbled amid the weak economy. Aluminum prices have dropped 27 per cent from their peak in 2011 due to weakening global demand in manufacturing and construction, driven in part by debt troubles in the United States and Europe. Slowing growth in China, one of the world’s largest commodity consumers, has also led to uneven demand for the metal, which is used in a wide variety of products such as cans, window frames and airplanes.
Alcoa, like many metals companies, has also been hit with higher raw material and input costs such as energy, which the company said it must get under control.
“These are difficult but necessary steps to improve Alcoa’s competitiveness, preserve and grow shareholder value and protect jobs in the rest of the Alcoa system,” Alcoa chairman Klaus Kleinfeld said in a statement after markets closed on Thursday.
Alcoa’s announcement, just days before the company’s fourth-quarter earnings release on Monday, sets a worrisome tone for the upcoming earnings season. Analysts have slashed profit forecasts for Alcoa, and several expect the company to report a loss.
Alcoa’s production cuts come nearly three months after aluminum giant Rio Tinto PLC said it plans to scale back its aluminum business by selling more than a dozen of its higher-cost, lower-quality aluminum assets outside Canada, also to improve falling margins.
Four years ago Rio made a big bet on aluminum, by expanding its position in the commodity with the $38.1-billion purchase of Montreal-based Alcan in 2007. That deal turned out to be ill-timed, on what turned out to be the eve of the global commodities crash.
Aluminum prices plunged from highs of around $1.40 a pound in 2008 to around 60 cents in 2009. The price bounced back to about $1.20 early in 2011, but has since fallen to about 90 cents as buyers remain cautious about the outlook for the global economy.
Alcoa’s cuts include the permanent closing of its smelter in Alcoa, Tenn., where production was curtailed in 2009. It will also close two of six idled lines at its smelter in Rockdale, Tex. Together, the closings represent about 7 per cent of global capacity, the company said.
The other 5 per cent of curtailments will come from reductions that Alcoa said will be announced “in the near future.”
“The closures highlight one of Alcoa’s pressing issues, that of owning old smelters with high cash costs,” BMO Nesbitt Burns analyst Tony Robson said in a note. Mr. Robson said cutting capacity should “marginally assist” the current market surplus for aluminum.
Alcoa said its cuts will result in a fourth-quarter after-tax restructuring charge of between $155-million and $165-million, or about 15 or 16 cents a share.
The company is traditionally the first major corporation out of the gate to report quarterly earnings, and is an economic barometer for what’s to come from others.
Bloomberg News reported Thursday that Alcoa’s earnings estimates have plunged, leading some analysts to expect a potential loss for the last three months of 2011.
Profit will tumble 96 per cent to 1 cent a share from 21 cents a year earlier, Bloomberg said, citing average estimates of 18 analysts. That’s 82 per cent less than the average projection from a month ago. Bloomberg said nine of the 12 estimates compiled within the last 28 days are for Alcoa to post a loss in the fourth quarter.