Alcoa forced to slash capacity on weak prices


A weak aluminum market continues to cause problems for Alcoa Inc. On Thursday afternoon, the aluminum giant announced it is shutting down 531,000 metric tonnes of smelting capacity, or 12% of its total capacity. That will result in restructuring charges of US$155-million to US$165-million in its fourth quarter earnings, which will be reported on Jan. 9.

“Alcoa’s headline earnings will now almost certainly be negative,” BMO Capital Markets analyst Tony Robson wrote in a note.

Alcoa has no choice but to shut its higher-cost operations as aluminum prices are down around US90¢ a pound. They were more than US$1.10 six months ago. “The closures highlight one of Alcoa’s pressing issues, that of owning old smelters with high cash costs,” Mr. Robson noted.

The future direction of Alcoa shares depends on the outlook for the aluminum market, which is currently struggling because of excess inventory and capacity.

Fraser Phillips, an analyst at RBC Capital Markets, expects that the market will be over-supplied over the longer term, and warned that prices will remain under downward pressure as long as global leading indicators are declining. He has an underperform rating on Alcoa shares

“We expect rising costs will put downward pressure on [Alcoa’s] margins. We see limited upside potential for the share price over the next 12 months,” he wrote.

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