Aluminum manufacturer and Dow Jones industrial average component Alcoa (AA) will open the third-quarter's earnings season when it reports results on Tuesday, October 9 after the markets close. Due to a slowdown in manufacturing in the United States, Europe and China, Alcoa will likely report disappointing results, including reducing its forecast for the coming quarters.
Aluminum prices have been weak, and the supplies of the industrial commodity remain abundant. Spot aluminum prices averaged roughly $1,900 per metric ton during Q3, compared to an average price of nearly $2,700 at which Alcoa sold aluminum in Q3 2011. If Alcoa's average price of aluminum sold turns out to be consistent with this known average spot price, it would result in an average price reduction of about 29 percent.
Beyond a reduced price for aluminum, slowing demand is a major concern, and not just for Alcoa. The company provides aluminum to companies involved in the manufacturing of automobiles and aerospace products, as well as to the construction market. As a result of the broad use of aluminum across so many products, Alcoa's performance may provide a rough picture of global economic growth.
During the third quarter of 2011, Alcoa's net income totaled $172 million, or 15 cents a share, on $6.42 billion in revenue. Estimates fell during the past quarter, from 12 cents down to an average estimate of one-cent on $5.57 billion in revenue. This would be less than a 13 percent reduction to Alcoa's revenue, or less than half the difference between the average spot price for aluminum during Q3 of 2012 and the price Alcoa sold aluminum at during Q3 2011.
Though shares of AA have appreciated by 6.24 percent since the start of 2012, this is well below the 15.8 percent appreciation that the S&P 500 (SPY) has experienced during the same period. Over the last 12 months, Alcoa declined by 5.36 percent, while the S&P 500 appreciated by about 26 percent and the Dow Jones Industrial Average (DIA) appreciated by about 22.37 percent. See a one-year performance chart of AA and these benchmarks:
Over 70% of Alcoa's sales are in the U.S. and Europe, where any downturn in demand is likely to be recognized and reported by the company. China is the world's largest producer of aluminum, and often increases its production of materials like aluminum and steel in response to its own internal slowdowns in manufacturing. Current global aluminum market oversupply is over 5,400 metric tons -- a 5.3 percent increase compared the start of 2012.
So far in 2012, Alcoa's shares have performed roughly in line with Aluminum Corporation Of China Limited (ACH), a Chinese mid-cap aluminum producer, and somewhat comparably to Century Aluminum (CENX), a U.S. small-cap aluminum producer. These competitors, among others, will likely move along with Alcoa in response to its Q3 report. The chart below shows a one-year performance comparison of AA, ACH and CENX:
At the end of the second quarter of 2012, Alcoa forecast a slight global aluminum deficit for 2012, which appears ripe for revision. Moreover, if China continues to ramp up its production of aluminum, oversupply should be expected to increase and aluminum prices should remain under pressure.
On October 2, Alcoa noted that it will take charge of about $85 million, or about $0.08 per share, in the third quarter related to the environmental cleanup of Grasse River, a river near one of its U.S. smelting facilities. This charge will be excluded from Alcoa's headline EPS -- about $0.01, according to Wall Street's current average estimates. Including this charge, estimates would be reduced to a seven-cent loss.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.