Alcoa Beats Expectations but China Slowdown Evident

Alcoa

kicked off the third quarter earnings season Tuesday with results that beat analyst expectations despite lower aluminum prices and sluggish demand in China, the world's largest aluminum consumer. Alcoa also reduced its outlook for aluminum consumption growth in 2012 from seven percent to six percent, largely because of sharply lower truck and trailer production in China. The company reported a third quarter net loss from continuing operations of $143 million or $0.13 per fully diluted share. Excluding special items, including $120 million for remediation projects in New York, Canada and Norway and charges related to the settlement of a lawsuit by Aluminum Bahrain, Alcoa earned $32 million or $0.03 per fully diluted share. The major negative factor during the third quarter was lower London Metals Exchange (LME) prices. Alcoa management maintains that LME prices have been “decoupled from market fundamentals” since the third quarter of 2011. In its presentation to analysts, Alcoa shows that aluminum demand, although slower than expected, is still running slightly ahead of supply and that the overall market for aluminum and alumina, which is used to make aluminum, is largely in balance. Aluminum inventories are declining, regional premiums for physical deliveries are at high levels and yet the price of aluminum on the LME at the end of the third quarter was $2,112/metric ton, down some 14 percent from the third quarter of 2011, according to

. “'We do see a slight slowdown in some regions in end- markets, and the main driver for this is China,' Chairman and Chief Executive Officer Klaus Kleinfeld said on a conference call with analysts, according to

. Chinese demand may pick up at the end of the fourth quarter because of stimulus spending, he said.” Production of trucks and trailers, one of the main end uses of aluminum, was down by 8-11 percent in Europe and by a staggering 18-21 percent in China, according to the company's analyst presentation. However, this was largely offset by strong demand from the aerospace industry. Reuters wrote, “Kleinfeld was bullish about Alcoa's downstream businesses, noting that the aerospace and automobile markets were coming back strongly from the recession. 'Global aerospace remains solid,' with a backlog of 8,500 planes, or eight years work, he said. ‘In autos, we are seeing an increase of 11 to 15 percent (annual) growth in North America.'" Despite the fact that Alcoa did beat analyst expectations, the share is trading down nearly four percent early Wednesday morning, just around the 50-day simple moving average of 8.88. Given that the 50-day moving average is in an uptrend and that the third quarter numbers and fourth quarter outlook for Alcoa are not so bad, it might make sense to go long around current levels with an initial price target at the 200-day simple moving average of 9.28.