Aluminum slump has Alcoa staring at quarterly loss

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NEW YORK - Alcoa Inc (AA.N), the largest U.S. aluminum producer, could end up posting a fourth-quarter loss due to a dizzying drop in the metal's price in the last six months as the euro zone debt crisis and an economic slowdown in China hurt demand growth.

At least five Wall Street analysts cut earnings estimates in the last week and 18 slashed their full-year 2011 estimates since September for Alcoa, which will announce results on Monday after the market closes.

Analyst Bridget Freas of Morningstar in Chicago noted that Alcoa's fortunes are tied very closely to the price of aluminum, which fell 6 percent in the fourth quarter.

"We have seen a weakening trend in the last few months and it will show in the results," she said. "Most analysts are blaming what has happened with the LME (London Metals Exchange) price and we ended the year on a low point."

The price of aluminum fell 18 percent, from $2,470 per tonne at the end of 2010 to $2015 last week. Traders cited the euro zone crisis and China's economic slowdown for hurting prospects for demand growth that send the metal on a downward track after May.

And that, says Wall Street, can only hurt Alcoa's bottom line.

"They had a pretty weak quarter and should come in around the break-even mark," said Freas, who does not give a quarterly estimate. Her full-year estimate of 80 cents per share is unchanged, she said, since she has already factored in the lower metal price.

"They still face high raw material costs , but the biggest driver (of Alcoa's results) is the price of aluminum.

"They will not be posting the kind of results (they did) at second-quarter levels," Freas said.

According to Thomson Reuters I/B/E/S, analysts on average expect Alcoa's fourth-quarter profit to be 1 cent per share. Eight analysts expect a loss in the quarter. In the same quarter of 2010, Alcoa's profit was 21 cents per share.

In the third quarter, Alcoa posted a profit of 15 cents per share, lower than the second quarter's 32 cents per share.

Analyst Peter Ward of Jefferies lowered his fourth-quarter estimate to break-even from 19 cents per share.

"Alcoa has disclosed it expects rising sequential costs at the same time that LME aluminum prices weakened," he said. But he added that Alcoa's shares "offer some modest upside" if U.S. economic data improve.

Aldo Mazzaferro of Macquarie Equities Research cut his quarterly estimate from a profit of 6 cents per share to a loss of 7 cents per share, saying he took a conservative view of aluminum pricing next year.

He said he might be more positive about the company "if we see sustained appreciation in aluminum pricing."

RBC Capital Markets' Fraser Phillips also sees a quarterly loss -- of 6 cents per share from a previous estimate of a profit of 9 cents. But he was not optimistic about prospects in aluminum markets.

"We expect prices to remain under downward pressure as long as global leading indicators are declining," Phillips said.

"Over the longer term ... the aluminum market will continue to suffer from significant excess inventory and capacity and we expect aluminum prices to be constrained as a result."

David Lipschitz of CLSA also cut his estimate, to a quarterly loss of 4 cents per share from a profit of 6 cents, and lowered his estimates for 2012 and 2013.

"Alcoa's fourth-quarter earnings are likely to be weak not only because the price of aluminum has fallen ... but end-market demand, not surprisingly, has remained slow."

One analyst, Davenport & Co's Lloyd O'Carroll, remained bullish on Alcoa, estimating that aluminum prices will rise in 2012. Although he lowered his fourth-quarter earnings estimate to 2 cents per share from 4, he reiterated his "buy" rating and $18 share price target for Alcoa.

"Higher prices, along with strength in key end markets such as aerospace and autos, should take Alcoa higher," he said.

In Thursday midday trading Alcoa shares were down 7 cents at $9.38.

In October, Alcoa Chief Executive Officer Klaus Kleinfeld said he still expects a near doubling of aluminum demand in the next 10 years, driven largely by China and emerging markets.

He cited weak economic conditions through 2011, particularly in Europe, because confidence in the global recovery has faded.

That has sapped aluminum demand from the automotive, industrial products, construction and packaging sectors since the second quarter, with only the aerospace and transport sectors growing, he said.