Conference Call Highlights: Alcoa on Commercial Paper and China

Includes: AA, BA, IYM, UYM, VAW, XLB, XME
by: Judy Weil

Aluminum manufacturer Alcoa lost $1.19 billion in Q408. The company is cutting production and headcount to brace for further declines in demand next year. Alcoa generally kicks off the earnings season each quarter, and the industry bellwether sheds light on other aspects of the global economy. Some key quotes from Alcoa’s Q408 conference call: (NYSE:AA)

If the dollar goes down or oil goes up:

Profit in the alumina segment decreased 21% or $44 million. A 16% reduction in realized price was partially offset by a $33 million sequential benefit associated with the Apache gas outage, lower fuel and gas prices and a lower cost base due to a stronger U.S. dollar. Looking into next quarter we anticipate further top line pressure as the lag effect on pricing becomes more apparent... Fuel and oil costs are trending lower. However, the U.S. dollar is slightly weaker today than the fourth quarter average.

Alcoa’s exposure to Boeing: (NYSE:BA)

The effects of the machinist strike at Boeing reduced [can sheet] profit by approximately $10 million.

Engineered products and solutions segment: Normal seasonal declines accounted for $68 million reduction in sales and the Boeing machinist strike reduced profit by about $5 million.

Commercial paper market:

We have been successful in placing commercial paper with maturities greater than one week especially in comparison to other tier two issuers. We averaged 79% for this quarter over one week during the quarter and hit 96% during December.

We expanded a $1.2 billion revolver… to $1.9 billion… [But] we don’t have any current plans to draw on the revolver because we are having great success in the commercial paper market.

Q: Some credit rating agencies put you on review for downgrade. Would that not make the issuance of commercial paper more difficult and so could you envision a situation where you may not be able to issue as much or roll over as much commercial paper as in prior months?

A: We have got a normal 5-year revolver and on top of it we have an additional bank facility. All of those are borrowing capacities that far exceed our current short-term needs. [Also,] even at the time when the credit agencies put us on watch, which usually is a time when people are faced with a little bit more question marks, we rolled commercial paper in a good way.

Is Alcoa focusing on making cheaper grade metals?

The price deterioration was compounded by the significant reduction in premium product sales… We have been using Alcoa’s scale and well established global supply chain to buy raw materials such as coke and caustic from a variety of non-traditional sources where we can find better pricing. We have been able to change specifications to allow for different compositions and materials to be more flexible in our sourcing.


We have seen quite a dramatic drop in demand [in Russia.] The government is stepping up big time to… support key industries… like automotive, aerospace defense, packaging and transportation… All of those markets are our end markets in Russia.

We are the only Russian [canning] manufacturer. We have the world’s largest extrusion press as well as forging press there and on the improvement of the new stuff we are putting in there, things are getting better. We will be able to produce and then tap in Russia as the only ones according to customer qualifications in the first half of the first quarter.


We have seen construction coming down 40%, auto down 17%... At the same time the government has stepped up with a $680 billion stimulus package. Of the same magnitude of the package here in the U.S. for an economy that is obviously substantially smaller. The good news is they will invest a lot of that in infrastructure and those of you who know China better know the infrastructure projects in China are pretty much lined up. The money will flow very quickly through the system and generate direct demand… We are seeing already some positive effects from that program by some demand stimulation in China.

Some perspective:

By 2050 there will be almost 40% more people on this planet. This means 3 billion more people. More than 60% of those will live in large cities. Just imagine… the enormous demand on infrastructures and the environment. Those trends will drive 6% annual growth of the industry for the next decade.

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