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By Stuart Burns

Alcoa Inc. (AA) may not be considered the bellwether for the manufacturing sector that it once was, and it may not be the world’s largest aluminum company anymore, but its spread of activities – from alumina through primary aluminum smelting to basic semi-finished metals, high-end rolled and extruded products and sophisticated engineered products – is probably second to none.

So the performance of the major aluminum company’s various divisions can tell us quite a lot about the wider aluminum industry, and while the firm was pushed into overall net loss by some exceptional items, the underlying story has some bright spots.

A Bloomberg article quoted numbers from an Alcoa presentation reporting its quarterly results. Once some exceptional items such as a provision for smelter closure costs and possible fines over a bribery investigation by the Department of Justice (DOJ) are stripped out, the firm made second quarter earnings of $76 million, above most analysts’ expectations and with positive contributions from nearly all sectors.

The bugbear, not surprisingly, was the primary smelting division.

Alcoa’s smelting division posted a $32 million loss and continued to struggle with a global marketplace that in the firm’s estimation is facing a 315,000-ton production excess this year.

LME stocks have risen to a record high of 5.45 million tons, contributing to low prices (the 3-month LME aluminum price closed at $1,783 per metric ton yesterday) and, in Alcoa’s estimation, forcing about a third of global production into the red, even after some smelters benefited from record-high physical delivery premiums.

So Where’s the Good News?

Well, Alcoa saw the writing on the wall a long time ago and has been working hard to cut costs and close loss-making primary production capacity; at the same time, investment has been flowing into downstream operations that are now enjoying strong sales growth and kicked in a rise in operating income of 12% over the last quarter, exceeding even the firm’s own predictions of 5% just a few months ago.

Leading the strong performance is the engineered products division, making products such as aircraft wings and fasteners for the aerospace industry and parts for the automotive industry. According to Reuters, Alcoa is expecting a 9% to 10% increase in aluminum demand this year from the aerospace sector, driven by a recent flurry of aircraft orders [Boeing Co. (BA) and Airbus SAS secured orders for 848 aircraft valued at $129 billion at June’s Paris Air Show, on top of an already large backlog of orders within the aerospace industry].

Alcoa also sees increased demand from the automotive, commercial transportation and construction industries, contributing to a 4% growth in demand in North America, 7% globally and 11% in China, according to an FT article.

Results for other producers will be gradually coming out over the next few weeks, but expect more of the same – the likes of Aleris and Novelis will be seeing similar trends: strong performance from the more sophisticated end of the downstream operations, constrained results from common alloy standard products, and probably losses from those firms with smelter operations.

Source: What Alcoa Inc.'s Quarterly Earnings Results Say About Aluminum Industry