Could Dr. Doom's "Perfect Storm" Trip Alcoa?


Following yesterday's market close, Alcoa (NYS: AA) led off earnings season for the bigger companies, just as baseball's All-Stars were contesting their Home Run Derby. And while the aluminum giant didn't come close to smacking anything close to an outfield wall, it nevertheless managed to figuratively leg out an infield single.

With aluminum-related prices having sagged during the quarter, Alcoa incurred a net loss of $2 million, or $0.00 per share, a major slide (let's keep those baseball metaphors coming) from its profit of $322 million, or $0.28 a share, in the second quarter of 2011. But if you back out a $45 million charge related to an effort to settle a lawsuit with Aluminum Bahrain, along with other items, the company earned $0.06 per share for the quarter. Analysts who follow Alcoa had arrived at a per-share consensus forecast of $0.05 for the quarter. Revenues dipped 10% to $5.96 billion, versus $6.59 billion a year earlier.

The light metal drops
Yesterday, the price of aluminum traded on the London Metal Exchange declined to $1,887 per metric ton. That figure was nearly 5% below the $1,982 average for the quarter, and was a 13% sequential decline from this year's first quarter. Given the direction of prices, other aluminum companies, including smallerCentury Aluminum (NAS: CENX) and Kaiser Aluminum (NAS: KALU) -- which will tell us about their results on July 24 and 25, respectively -- likely will also be affected by the lower levies.

Taking a quick glimpse at Alcoa's four operating segments, after-tax operating results for the alumina unit declined fully 88% year on year to $23 million, while the similar figure for primary metals swung to a $3 million loss, from a positive $201 million a year ago. The ATOI from global rolled products was less hard-hit, sliding 4% year on year to $95 million. But easily the star of the show was engineered products and solutions, which saw its after-tax operating income expand 4% to $160 million.

The foremost forecasting of the future
However, since investing is primarily an exercise in looking ahead, rather than peering into the rearview mirror, Alcoa CEO Klaus-Christian Kleinfeld's assessments of the primary end markets for aluminum merit attention. As he noted on his conference call, management expects the aerospace sector to expand by a healthy 13% to 14% this year. Similarly, the automotive market is anticipated to grow by 10% to 14% in North America, while Europe is likely to pull back by 4% to 9%, leading to global growth of 4% to 8%.

Similarly, the market for heavy trucks and trailers is forecast to increase by 4% to 8%, with North America "really driving it" and Europe stuck in reverse. Kleinfeld expects the beverage cans and packaging, commercial building and construction, and industrial gas turbines markets all to expand at or near 3% globally.

Kleinfeld concluded his formal remarks by noting that, "We basically have solid market fundamentals; strong aluminum demand, 7%; supply and demand balance or a deficit. We are focusing on improving our competitiveness, coming down the cost curve. And we're tracking well here for this year."

A contrary notion?
Far be it from me to take issue with Kleinfeld regarding global supply/demand conditions going forward. Nonetheless, while a number of aluminum producers -- including Russia's UC Rusal, the largest of them all -- are decreasing production levels, in several cases the cuts are unlikely to reach the levels expected earlier. As just a couple of examples, Rusal may only curtail its output by slightly more than 60% of its originally intended 400,000 tons. And Anglo-Australian giantRio Tinto (NYS: RIO) stands to produce more aluminum from its Bell Bay facility on the island of Tasmania than might have been anticipated earlier.

It's also difficult to discard the prognostication of NYU economist Nouriel Roubini. In May, "Dr. Doom," who accurately forecast the 2008 global slump, unleashed an expectation that a tepid U.S. economic recovery, European debt difficulties, a slowing of emerging market economies, and an Iranian military conflagration would comprise a "perfect storm" that would badly damage the global economy.

Yesterday, Roubini said that the "2013 perfect storm scenario I wrote on months ago is unfolding." In fact, Chinese trade data, also released yesterday, indicated lower-than-expected imports and a slowing in the export numbers for the country. As such, I'm inclined to be less sanguine about the economy than Alcoa's CEO.

The Foolish bottom line
Given Alcoa's year-on-year pullback, questions about aluminum's supply-demand scenario, and the potential for a realization of Roubini's "perfect storm" prediction, I'll be especially interested in the sentiments from steel manufacturerNucor (NYS: NUE) , which Monday will become the second major metals company to release its results. Beyond that, I urge Fools to keep careful tabs on Alcoa by adding the big company to their individual versions of Motley Fool's My Watchlist.

At the time thisarticle was published Fool contributor David Lee Smith doesn't own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Nucor. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Originally published