Ahead of the Bell: Alcoa Inc.

Alcoa expected to benefit from tightened supplies, growing demand in 2012

Associated Press

NEW YORK (AP) -- Alcoa should see the return of rising aluminum prices this year, and profits, as producers address overproduction and demand grows in China, a number of industry watchers say.

Late Monday, Alcoa posted its first quarterly loss in more than a year as it struggled with a 12 percent drop in aluminum prices.

Alcoa booked $185 million in charges as it shut down some smelting operations and the Pittsburgh company is not alone in doing so, which is why some expect 2012 to be a better year for aluminum producers.

"Global production cuts of high cost capacity have begun in line with our expectations," said Peter Ward, an analyst with Jefferies & Co. "The trade press is reporting over 625,000 tons of high cost capacity in China has closed in recent weeks because of negative cash margins. And, the aluminum price has rallied about 6 percent in the past three weeks."

During a conference call with analysts Monday evening, Alcoa CEO Klaus Kleinfeld said he expects a global deficit in aluminum supplies of about 600,000 metric tons this year while demand increases 7 percent.

Ward expects aluminum prices to increase to $1.05 per pound in 2012, up from the current price of 93 cents per pound.

While he expects Alcoa to report an adjusted loss in the first three months of the year, Citi Investment Research & Analysis analyst Brian Yu sees the following three quarters as generating profits.

"Most of the growth is driven by China (up 12 percent year-over-year) while (outside of China), demand should grow at a more modest 4 percent, Yu said. "However at current pricing, management sees 32 percent or 5.7 million tons of China smelting capacity operating below cash costs. Either aluminum prices need to rise or further curtailments will limit production, potentially leaving aluminum with a 2012 market deficit of 600k tons or more."

Yu has a "Neutral" rating and $10 price target for the company while Ward has a "Buy" rating and $12 price target for the company.

Shares of Alcoa Inc. rose by 27 cents, or 2.9 percent, to $9.70 in premarket trading.

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