Alcoa cites near-term uncertainties, signalling caution for global peers

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Alcoa Corporation, the largest aluminium producer in the US, triggered concerns after failing to specify demand growth for the year and citing near-term uncertainties while reporting its second-quarter earnings.

This may signal concerns for Indian aluminium manufacturers whose financials are sensitive to base metal prices.

Alcoa said the 2022 market is expected to be in deficit and demand for aluminium is likely to be positive year on year. The company did not mention a growth rate for demand, which the street had expected because it typically announces it during the quarterly results.

Alcoa said in a presentation to investors that uncertainties include the impacts of China’s stimulus programme, disruption in exports from Russia, near-term economic growth concerns, and the threat of further curtailment in production given high global energy prices.

Alcoa’s net income increased 17.1 percent sequentially and 77.7 percent year-on-year to $549 million in the second quarter, or $2.95 per share.

Adjusted EBITDA excluding special items decreased 15 percent sequentially to $913 million, primarily on lower metal prices late in the second quarter and higher costs for raw material, energy, and production. However, adjusted EBITDA (earnings before interest, depreciation and amortisation) rose 47.7 percent year on year.

The 11 percent sequential increase in revenue to $3.6 billion and strong cashflow enabled stock buybacks and the payment of cash dividends. The company also announced an additional buyback worth $500 million for the remainder of the year, after buying back shares worth $380 million so far.

However, Alcoa was not upbeat about performance in the ongoing quarter.
The company anticipates a $20 million negative impact to net income in the third quarter as a result of the Warrick line curtailment. Earlier this month, it said one of its three operating potlines at the Warrick smelter in Indiana was curtailed due to operational challenges stemming from workforce shortages.

For alumina, Alcoa expects about $30 million in higher energy and raw materials costs.

For aluminium, it expects to benefit from a $30 million savings on account of lower alumina costs. But the gains may be partially offset due to a likely dent of $30 million from higher energy and raw material costs in the ongoing quarter.

Cues for Indian aluminium makers

The financials of Indian aluminium producers NALCO, Hindalco and Vedanta are highly sensitive to London Metal Exchange prices. Based on Alcoa’s near-term demand outlook, their realisations may be affected since huge exports from China may be a disruptor for LME aluminium prices over the near term.

Brokerages don’t expect positive earnings from the non-ferrous industry.
“High costs and lower benchmark prices are expected to drag down earnings for base metal companies,” CLSA said in its preview report for Q1 of FY23.

The brokerage said it would watch for the demand outlook, cost of production, and an update on expansion projects, among other things.