What Rising Aluminum Prices Could Mean for Alcoa’s Earnings
It means that Alcoa (NYSE:AA), the largest domestic producer of Aluminum, could see its second quarter profit double. The company will kick off the second quarter of this year’s earnings season when it reports its latest financial data this afternoon. Current analyst expectations are predicting more than a twofold rise in profits this year, with profits excluding one time items expected to total $.33 per share, up from $.13 per share last year.
The boon to the company’s income statement is thought to be derived from surging demand for raw materials in emerging markets such as China (NYSE:FXI) and others that are pushing aluminum prices higher. Bloomberg notes, “Aluminum prices averaged 24 percent higher on the London Metal Exchange in the quarter as usage soared in China, the biggest consumer. Alcoa Chief Executive Officer Klaus Kleinfeld is forecasting global demand will increase by 12 percent in 2011 and double by the end of the decade as Asian countries build more office blocks and buy more aircraft, cars and trains.”
Also contributing to the company’s expected record profits was strong demand from regular customers such as General Motors (NYSE:GM) and Airbus SAS. The company derives roughly 10% of its annual revenues from dealings with aircraft makers, and this year Boeing Aircraft (NYSE:BA), and Airbus may both increase their orders of Alcoa-made parts.
The standout concern for the aluminum producing company are higher production costs it saw in the second quarter this year. Particularly, the cost of coke and pitch, raw materials used in aluminum production, and electricity all increased in Q2, which could have the effect of undercutting an otherwise highly profitable quarter for Alcoa. A Deutsche Bank (NYSE:DB) analyst concludes, “I don’t think it’s derailing the thesis for Alcoa. I think they should be able to push up higher volumes in coming quarters.”