Outlook Not So Shiny For Alcoa

Moody’s Investors Service cut the credit rating of Alcoa, Inc. (NYSE:AA), the largest producer of aluminum in the U.S., after a global oversupply caused the price of aluminum to fall.

The New York-based Alcoa has cut back costs, expanded profitable areas, and stopped work on a high-cost smelting project, but the company has still suffered from the falling price of aluminum.

Moody’s long-term rating on Alcoa’s $8.6 billion in debt was lowered from a Ba1 to a Baa3. The investors service added that it thought the outlook was stable and the rating wouldn’t likely be downgraded again. Moody’s went on to say in a statement that it doesn’t believe recoveries in the auto and aerospace industries will be enough to help Alcoa return to profitability, as “the aluminum price has been in a downward decline since reaching post-recession highs in 2011.”

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Alcoa fired back in a separate statement, “We believe Moody’s decision is a greater reflection of macroeconomic conditions and the volatility of metal prices than a true statement of the financial and operating strength of Alcoa.”

In recent years Alcoa was replaced by Australia’s BHP Billiton Ltd. as the world’s most valuable materials company, and aluminum producers in Russia and China have continued to take bigger shares of the market. Alcoa’s credit rating with Moody’s has continued to fall since 2002.

Aluminum is the third worst performer on the UBS Bloomberg CMCI index of commodities in the past five years, with a negative return of 47 percent. According to research from Bloomberg, global output of the metal has exceeded demand for the past eight years.

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Alcoa is taking multiple approaches to reducing its debt, which is currently the lowest it has been since 2008. The company will continue to shut down smelters, including two lines at its Baie-Comeau smelter in Quebec, after already making cuts in Tennessee, Texas, Italy, and Spain throughout 2012. In addition, Alcoa will pay $422 million in notes due in July, securities that can be swapped for stock.

Alcoa is also betting on the success of a joint venture with Saudi Arabian Mining Co. on a new 740,000-ton smelter with lower cost-capacity than the company’s other smelters. It’s hoped that the new smelter will allow Alcoa to focus on its engineered- and rolled-products divisions. The company believes that as auto and aircraft makers begin using more aluminum to build cars and update aging aircraft fleets, Alcoa will strategize to obtain more complex, higher-profit products, though Moody’s is cynical about the prospect of that success.

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