Alcoa beats forecasts as earnings kick off

Net income more than doubles after shift from commodity products

Alcoa, the US aluminium group, reported second-quarter profits well ahead of analysts’ expectations thanks to a sharp turnround in the performance of its commodity metal business.

Opening the US quarterly reporting season on a positive note, Alcoa said underlying earnings per share for the quarter had more than doubled to 18 cents, compared with an average forecast of 12 cents.

Klaus Kleinfeld, chief executive, said the company was benefiting from its positioning as a supplier of lightweight materials to industries such as aerospace and automotive, and from cost-cutting and smelter shutdowns to improve the profitability of its production.

Speaking to the Financial Times, he said Alcoa’s markets were “generally pointing in the right direction”, and described the economic outlook as “not at all bad”. The company stuck to its forecast that the world aluminium market will grow by 7 per cent this year.

Alcoa has been shifting away from commodity production towards more specialised products such as alloy components for cars and aircraft, most recently with the proposed $2.85bn acquisition of Firth Rixson, a UK-based aerospace parts manufacturer.

However, the commodity aluminium business showed the most marked improvement, swinging to a $97m profit from a $32m loss in the same period of 2013, following shutdowns at high-cost smelters including cuts at two sites in Brazil. The company also started up its new smelter in Saudi Arabia, which it describes as “the lowest cost aluminium production facility in the world”.

Aluminium shipments fell 4 per cent to 1.217m tonnes, but Alcoa offset that by selling more higher value products.

We ask ourselves: Can we run Alcoa’s assets better than the competition can?

Klaus Kleinfeld, Alcoa chief executive

Revenues were also ahead of expectations at $5.84bn, down just $13m from the equivalent period of 2013.

After-tax operating profits at the “downstream” engineered products business rose 6 per cent to $204m.

Alcoa has been making progress in persuading car manufacturers to use more aluminium as a way to reduce the weight of their vehicles and improve fuel efficiency. Mr Kleinfeld said Ford’s decision to use aluminium for its F150 truck, the most popular vehicle in the US, “makes a big difference.”

He added that the Audi A8, one of the early cars to use a lot of aluminium, had sold about 700,000 vehicles since the 1990s, but there were about 700,000 F150s sold every year.

Alcoa’s shares have enjoyed a remarkable rebound over the past year, almost doubling by the end of last week from a low point of $7.70 last August. They rose 1.1 per cent after hours to $15.02.

Mr Kleinfeld said the market was starting to appreciate Alcoa’s performance in markets such as aerospace and automotive parts, and to recognise its cost cutting in the commodity aluminium businesses.

“We were undervalued before. People didn’t understand our transformation,” he said. “It’s not that new, but now you’re seeing it in the numbers.”

Alcoa is also moving beyond aluminium to strengthen its position in other lightweight metals; Firth Rixson does not use any aluminium.

Mr Kleinfeld said it still made sense for Alcoa to control every stage of the production process, from mining bauxite to manufacturing products, but added that the question was under constant scrutiny.

“We look at the set-up of the business all the time,” he said.

“And we ask ourselves: Can we run Alcoa’s assets better than the competition can?”

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