Alcoa Decides To Close Aluminum Smelter In Italy Amid Continued Headwinds

by Trefis Team
Rate   |   votes   |   Share

Alcoa‘s (NYSE:AA) has announced that it is closing down its Fusina smelter in Venice, Italy. This will result in a $30-35 million in restructuring charges for the company in the second quarter. Non-cash charges will account for about half of this.

Alcoa had already been cutting its smelting capacity at the plant for the last three years due to high costs. In view of persistently low aluminum prices it has finally decided to shut down the facility. Two months back, the company had already announced plans to cut down smelting capacity by 460,000 metric tonnes over the next 15 months. The smelting capacity cut at the Venice plant is a further addition to already planned curtailments. [1]

While low prices may be one reason for Alcoa’s actions, it may also have been driven by rating agencies’ actions. While Standard & Poor’s lowered its outlook on Alcoa to negative from stable in April, Fitch Ratings also lowered its outlook on Alcoa the same month. Moody’s went a step ahead in June and cut the company’s debt rating to Ba1, which is below investment grade. It cited Alcoa’s inability to trim debt in view of persistent industry weakness. This was despite the company’s claims that it is making efforts to cut costs and streamline businesses. It has a stated goal of lowering its position on the world aluminum cost curve by 10% and the alumina cost curve by 7% by 2015. [2]

See Full Analysis for Alcoa Here

Importance Of Aluminum Prices For Alcoa

Alcoa is organized into four business segments: Alumina, which mines bauxite and processes it into the precursor to aluminum; Primary Metals, which smelts aluminum; Flat-rolled Products, which makes sheets used in beverage cans as well as airplane wings and car parts; and Engineered Products and Solutions, which makes aerospace fasteners, turbine blades and truck wheels. While the Flat-rolled and Engineered Products and Solutions divisions produce value-added products and thus generate higher margins, a significant proportion of Alcoa’s earnings still come from the Alumina and Primary Metals divisions. This makes its earnings highly sensitive to aluminum prices.

Recent Aluminum Price Trends

Aluminum prices on the London Metal Exchange, which are used as a benchmark by the company to determine its own prices, have been dropping sharply since the end of February. Prices have dropped from $2,100/tonne at the beginning of the year to just above $1,700/tonne and are still trending lower. [3]

The continuing weakness in Europe and slowing Chinese growth are contributing to the decline in aluminum demand and prices. The Chinese economic growth rate in Q1 2013 was registered at 7.7%, which was much below expectations. The growth rate data for Q2 is also expected to be around the same level, if not lower. The country’s Purchasing Managers’ Index (PMI) data for the last few months has been weak because export orders fell due to tough external economic conditions. It is now believed that aluminum supply will outstrip demand by a wide margin this year. [4]

One factor that might explain falling prices is the persistently high aluminum inventory relative to demand, which may be keeping a lid on London Metal Exchange (LME) prices for aluminum. Also, despite falling aluminum prices, Chinese production is expected to rise by 10% from 2012. This represents an absolute increase of 2.2 million tonnes. Thus, despite inventories being at a record high, market forces have failed to rationalize supply through shutdown of smelting capacity in China. This is primarily due to state intervention in the form of provision of subsidies or renegotiated power contracts to smelters. According to Oleg Derispaska, the CEO of the world’s largest aluminum producer Rusal, about 42% of the current production capacity could be cut at prevailing price levels. [5]

While the latest capacity cut represents just about 1% of Alcoa’s total smelting capacity, we could see more such unplanned cuts in addition to the ones already announced. If aluminum prices continue on the present trajectory, further cuts would become inevitable.

We have a Trefis price estimate for Alcoa of $7.

Understand How a Company’s Products Impact its Stock at Trefis

  1. Alcoa to close smelter, blaming aluminum prices, Bloomberg Businessweek []
  2. Alcoa to Permanently Close Italy Smelter; Sees Charges, WSJ []
  3. LME Aluminum Price Graph, LME []
  4. China factory growth eases, adds to recovery risk, Reuters []
  5. Alcoa to Consider Cutting 11% of Capacity, WSJ []
Rate   |   votes   |   Share


Name (Required)
Email (Required, but never displayed)
Be the first to comment!