Alcoa 3Q results hit by high energy costs

Related tags Aluminium North america

Aluminium and packaging giant Alcoa has reported flat third-quarter
earnings, with a 20 per cent jump in primary metal prices offset by
higher energy and raw material costs, and various production

Net income was $283 million compared with $280 million a year earlier, while sales climbed 12.5 per cent to $5.98 billion. The flat figures have been blamed largely on higher input costs, particularly energy in Europe and North America.

Rising world energy costs, particularly oil prices to which continental European gas rates are tied, have triggered sharp increases in energy prices across the globe.

Energy charges account for 20-25 per cent of production costs of industries such as manufacturers of glass products, pulp and paper, and steel, rising to 40 per cent for aluminium smelters.

Businesses such as Alcoa are therefore highly susceptible to increasing energy prices. Chemical giant Dow is another.

"Our price increases in 2004 have not compensated for the tremendous rise in raw material costs during the first half of this year,"​ said Markus Wildi, commercial vice president for Dow's plastics portfolio in Europe, the Middle East and Africa. "Additional increases in raw material costs during Q3, as well as unusually high oil prices, have further eroded our margins."

So Alcoa is not alone in experiencing the knock-on effect of increasing petroleum and natural gas prices. But the group's earnings have also been negatively affected by several other events, including a strike at the firm's Quebec, Canada smelter and restructuring charges associated with the costs of closing its Washington and Ohio facilities.

And in anticipation of Hurricane Ivan, the company had to temporarily shut down its Jamalco alumina refinery, which has 1.25 million metric tons of capacity.

However, the cost of aluminium reached a nine-year peak on the London Metal Exchange on Thursday, reflecting lower inventories and a continued rise in demand from China. Alcoa​ said that its average realised price stood at 85 cents a pound in the third quarter, up from 71 cents/lb a year earlier, but unchanged from the previous three months.

Global consultant Davis Langdon told the UK's Financial Times​ that China's voracious demand for building materials, which had pushed the price of steel skywards, was having a similar short to medium term impact on aluminium and glass.

China, which is the world's largest single producer of glass and aluminium, supplying 25 per cent of the world's consumption of aluminium, had now become a major consumer of the products.

But the market looks to be settling down. UK-based Bloomsbury Minerals Economics predicted that the current deficit in aluminium supplies, which has helped drive up prices, would switch to a small surplus in the second half of next year.

It also said that consumption growth should slow, while production should increase as smelter expansions come on stream and labour disputes are settled at smelters in North America.

"While we are not pleased with the short term impact the labour issues have had on our bottom line, our actions are aimed at enhanced global competitiveness of our North American operations,"​ said Alcoa chief executive Alain Belda.

"In the near term, the primary aluminium market is expected to continue to experience strong fundamentals. Many of our end markets, particularly commercial transportation and aerospace, are showing signs of strength.

"Strong cash generation should continue, as we expect profitability for the first three quarters, even at the low end of this estimate, to be 40 per cent above 2003 levels. As we address the labour and cost issues, the company will be well positioned for better operating performance in the future."

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