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What is Alcoa saying?

Jan 11, 2005

As usual, Alcoa, was amongst the first US majors to declare its results yesterday on the US bourses. With revenues of over US$ 24 bn (2004) and profits of near US$ 1.4 bn (2004), it is no surprise that markets and analysts all over the world keenly await the results of this world's largest aluminium producer. In this article, we take a look in brief at the company's performance for the quarter ended December 2004 and more importantly, what is the outlook provided by the company with respect to aluminium prices going forward. The Aluminium Company of America, popularly known as Alcoa, is the world's leading producer of primary aluminium, fabricated aluminium and aluminium and is active in all major aspects of the industry. The company has a total consolidated global capacity of over 4 m tonnes, which represents almost 17% of world aluminium capacity. The company serves the aerospace, automotive, packaging, building & construction, commercial transportation and industrial markets. Though it has a presence in 43 countries, almost 65% of its revenues are derived form the US markets with another over 20% coming from Europe.

Before we proceed to brief about the company's December 2004 quarter performance and its outlook for the aluminium cycle (the company provides this for a quarter ahead), it must be noted that the outlook issued by the company during the previous three quarters of calendar 2004 were all positive. The company had maintained the stand all throughout the year that LME prices are likely to remain high on the back of growth in the aerospace, building & construction and packaging industries. It must be noted that unlike in India, where the power sector (near 1/3rd) is the largest consumer of aluminium, globally, transportation followed by packaging are the largest consumers of the metal globally. Aluminium prices closed 2004 higher by 23% point-to-point over December 2003 close.

Now let us look at the results and the outlook given by the global aluminium major.

Alcoa registered a 12% topline growth in the quarter ending December 2004 on the back of strong realisations (up 19% YoY). However, higher energy and raw material costs, higher freight rates and US dollar weakness (35% of the company's revenues are derived in foreign currencies) collectively dented margins of the company (down approx. 80 basis points YoY) and consequently, its bottomline registered a marginal 1% YoY growth during the quarter. Nonetheless, while the company, in its outlook, has expressed optimism over aluminium prices going forward on the back of strength in the global aerospace and distribution industry, it expects pressure on margins to continue, which it intends to tackle through effective cost control measures. The company expects the aluminium market to remain strong and aluminium supplies tight.

As far as our view is concerned, we remain positive on the aluminium market in the medium-term on the back of the recovery being witnessed in the US markets and also China, which has yet showed little signs of slowing down. It must be noted that on the back of the strong growth witnessed by China over the last few years and significant investments in infrastructure, power, auto and other manufacturing industries, the country has emerged as the second largest consumer of the base metal in recent times. However, the caveat here would be that since the Chinese consumption remains the key determinant of metal prices in 2005 and onwards, a close watch needs to be kept on the country's growth and activities for any signs of a slowdown. In this context, this is a high risk sector.

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