Alcoa To Post Loss, but What Does It Mean for the Economy?

Alcoa, whose results are traditionally viewed as an indicator of the country's economic health, is expected to post a third consecutive quarterly loss this week.

AP

But many on Wall Street no longer see the aluminum producer's numbers as a bellwether portending either a deeper recession or an easing of the global downturn.

"It's a large company in a major industry and it is the first to report, so it gets special recognition," said Joseph Battipaglia, a market strategist at Stifel Nicolaus & Co in Yardley, Pennsylvania.

"But it's only telling you about the health of the aluminum industry and that's not very good right now. 

"FedEx and UPS are better signs of a change in direction," he added, referring to the two largest U.S. shipping or package-delivery companies. "I wouldn't take what Alcoa says as a significant indication of how the American or global economy is faring."

Battipaglia said that even if Alcoa — the first member of the Dow Jones industrial average to release earnings — reported an upsurge of orders Wednesday, it was no real sign of a turnaround. Most customers let their inventories go down in recent months, he noted, and were now restocking while aluminum prices are relatively low.

Charles Bradford, an analyst with Affiliated Research Group of New York, agreed that Alcoa's results were no weather vane.

"Some people out there think it's a leading indicator of the economy, but those people don't understand the company. 

It's an indicator only of the aluminum price. "Alcoa will lose a fair bit of money (in the second-quarter results) because the aluminum price is down. "

One of the biggest driving factors (for Alcoa) is cost-cutting, not whether the economy is picking up," he added.

Pittsburgh-based Alcoa is expected to report a second-quarter loss Wednesday of 32 cents a share — narrower than its first-quarter loss of 60 cents a share, according to Reuters Estimates.

In April, the company said it expected continued end-market weakness for its flat-rolled products in the aerospace, construction and global transportation sectors in the second quarter.

Alcoa's stock, which hit a 52-week low of $4.98 in early March in New York Stock Exchange trading, rallied in the second quarter to around $10, but it's still way off its 52-week high of $35.66 a year ago.

It's All About Aluminun's Price

Bradford said Alcoa derives 70 percent of its earnings from aluminum production and its fortunes depend on the price of the metal, rather than its downstream business making products for the auto or aerospace industries, as well as cans and kitchen foil.

"Planes and truck wheels are not looking good and beverage cans depend on how hot the summer is. It has nothing to do with the economy," he said. "It's the metal price in London that counts."

In the second quarter, the spot aluminum price rose 17 percent to $1,630 per tonne, but it is still less than half its peak of $3,380 last July before the recession hit and demand dried up.

Min Ye, an analyst with Morningstar in Chicago, said the importance of the auto industry to the economy could not be ignored, including Alcoa's supply of aluminum to Detroit.

"But probably it's more just a coincidence since they report first and their ticker (symbol) is 'AA,"' she said.

"Judging by aluminum prices and volumes right now, chances are that in the second quarter, they will still be under pressure to make a profit."

Ye noted Alcoa had announced production cutbacks with the drop in demand, "but now aluminum prices are up a little, but it's not a sharp rebound.

"Input costs have come down some, but when volumes are lower and with aluminum prices low, at this price and with current capacity, it is hard to absorb fixed costs," she added.

She said smelters, powered by electricity to produce the metal, are very costly to take down and also to restart. One man who still looks closely at Alcoa's results, is Cummins Catherwood, managing director of Boenning and Scattergood, a brokerage and investment adviser in West Conshohocken, Pennsylvania.

"Take a look at their products," Catherwood said. "It's half the stuff you see. For me, they are one of the indicators of economic activity. Are people making more autos or planes or toasters?

"So when you see volumes increase, you see Alcoa respond. I always watch their earnings as a reasonable indicator of what you're about to see."

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