Wednesday, Dow component Alcoa (AA) posted better than expected earnings of 4 cents per share. The company’s surprise return to profitability was largely attributable to cost cutting measures, not new sales. While the way that Alcoa brought itself back to profitability may not be sustainable in the future, Alcoa did forecast an 11 percent increase in worldwide aluminum demand, largely on the back of growth in China. This rosy outlook has buoyed materials ETFs such as iShares Dow Jones Basic Materials Index Fund (IYM), Vanguard Materials ETF (VAW), and Rydex Equal Weight Materials ETF (RTM), all of which were up more than 1% in early trading Thursday. The Alcoa news is also having a ripple effect on the rest of the sector – all of the ETFs in our Industrials ETFdb Category were positive Thursday.
While the earnings numbers are undoubtedly good news for Alcoa, they don’t necessarily signal an end to the recession for basic materials manufacturers. A portion of the cost savings was due to lower materials prices. If these prices tick back upwards, Alcoa will have to pass the costs on to customers or suffer lower margins. Moreover, global stockpiles of aluminum increased to 4.59 million metric tons, double what they were last year. This large stockpile will continue to keep any future aluminum price increases in check and could force companies like Alcoa to accept lower margins for quite some time.