Alcoa Banks on Chinese Growth Amid ‘Lousy’ Prices

April 8 (Bloomberg) -- Alcoa Inc., the aluminum maker that just reported its first back-to-back losses in 15 years, is counting on productivity gains and China’s economic-stimulus plan to prop up results as demand keeps falling throughout 2009. Chief Executive Officer Klaus Kleinfeld said yesterday that the company will save $400 million a year by reducing its payroll and trimming other costs. China will be the only market where demand for the metal doesn’t drop this year as the nation’s $585 billion economic stimulus takes effect, he said. "If they can continue with the cost reductions, their earnings should be significantly better" in the second quarter, Chuck Bradford, a metals analyst at Bradford Research Inc., said in a telephone interview. Still, Alcoa may post another loss because of a "huge inventory overhang" that is depressing aluminum prices. World aluminum consumption will drop 7 percent in 2009, and sales may decline as much as 15 percent in global building markets and 18 percent to automotive customers, the company told analysts and investors in a presentation yesterday. The largest U.S. aluminum producer yesterday reported a $497 million net loss, capping its first back-to-back quarterly losses since the three months ended in March 1994. Another in the current quarter would be the first streak of three losses since 1992. The average estimate of 12 analysts is for a second- quarter loss of 33 cents a share, excluding some items. Alcoa rose 27 cents, or 3.5 percent, to $8.06 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have declined 28 percent this year. First-Quarter Loss The first-quarter net loss of 61 cents a share compares with net income of $303 million, or 37 cents, a year earlier, New York-based Alcoa, the first company in the Dow Jones Industrial Average to announce results, said yesterday in a statement. Sales dropped 41 percent to $4.15 billion. Excluding some items, the loss was 59 cents a share, trailing the average estimate of 14 analysts for a loss of 56 cents. Alcoa has responded to the declining results by slashing 13,500 jobs, seeking pay cuts from salaried and hourly workers and idling about 20 percent of production since the second half of 2008. Last week, Alcoa said it will halt about 120,000 tons of output and fire some workers at its plant in Massena, New York. Aluminum prices on the London Metal Exchange dropped 56 percent from a record in July to $1,475 a ton yesterday. ‘Lousy Price’ "They still have got a lot of production that’s losing money with prices being where they are," Tony Robson, a Toronto-based analyst at Bank of Montreal, said in an April 1 interview. "It’s a lousy price for any aluminum company to live with, not just Alcoa." Robson expected a 44-cent loss in the first quarter. He rates the shares "underperform" and doesn’t own any. Alcoa said changes to procurement practices saved $293 million in the quarter and lower overhead expenses reduced costs by $110 million. The company has cut its dividend, which will save $430 million in cash a year. Alcoa raised $1.4 billion from a stock and convertible note sale that topped the company’s forecast for $1 billion in proceeds, Kleinfeld said. The company has agreed to sell its investment in Rio Tinto Group to Aluminum Corp. of China for $1 billion and is seeking to sell other businesses to raise additional cash. Alcoa’s actions are "already beginning to bear fruit" and have helped lower the cost of producing aluminum by 30 percent, better than a company target of a 25 percent decrease, Kleinfeld said in the statement. Stockpiles Gain Aluminum prices gained 3.7 percent in March, the first monthly increase since June, and stockpiles tracked by the LME rose 0.6 percent in the past two weeks after 19 straight weeks of gains larger than 1 percent. "Excessive customer destocking cannot continue at the current pace," Kleinfeld said yesterday. Some of the improvement may be attributable to China’s $585 billion stimulus program, which is working on an economy that is 18 percent the size of the U.S.’s, Kleinfeld said. Consumption tied to the stimulus is "already happening," he said.

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