Recession Hits Alcoa; Raw Material Demand Substantially Reduced

With the stock looking to fall below its current $10 per share level, after reaching above $44 as recently as May of 2008, aluminum giant Alcoa (NYSE:AA) has certainly seen better days. CEO Klaus Kleinfeld said "The aluminum industry is caught in a perfect storm," when describing the company's current misfortunes to analysts after releasing the earnings results for the most recent quarter. Judging from the number of "perfect storms" that we've seen sweeping through the American economy, it's difficult to recommend any safe haven investors in the stock market at this point. Alcoa lost $1.19 billion dollars in the last three months according to their quarterly report.

The company attributes the loss to declining prices and rising inventories. That's what happens in a recession, especially in basic commodities such as aluminum. This is not a perfect storm, it is the regular cycle of the ebbing tide. Alcoa is already shedding jobs and cutting aluminum output, but now, they say, they may need to reduce their operations even more. Although they did not cite additional job cut figures in their statements, with production costs currently higher than the selling price, those cuts are certainly coming.

Kleinfeld stated that aluminum demand would likely drop another 2% in 2009 on top of the 3% decline of 2008. If you needed any further proof that we are in a global recession, substantially reduced demand for raw material commodities is a pretty good indicator. Alcoa is likely to post a loss for 2009 based on most analysts' expectations. It is hard to see a reason to buy Alcoa shares at the current level. However, it is one that should be on your watch list when we see strong signs that the recession is ending. When the global economy gets back on track, perhaps at the tail end of 2009, discount Alcoa shares might be a good idea. Of course, timing that purchase and predicting the resumption of economic growth is a tricky business.

Oil prices have also resumed their downward slide, reaching $37/ barrel after six straight down days. Inventories have been rising on reduced demand. Although prices at the gas pumps have risen in reaction to the Russia-Ukraine natural gas dispute over the last week, expect gasoline prices to begin dropping again in line with aluminum and other basic materials. It doesn't seem possible that we will see gasoline prices below $1 per gallon at this point, but you might be surprised how close we get.