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Alcoa Full-Year Net is Seen to Decline by 5% to 7% Robert Guy Matthews, Staff Reporter The Wall Street Journal, January 8, 2003

Global Overcapacity Continues to Keep Aluminum Prices in Yearlong Slump

Alcoa Inc., the world's largest aluminum maker and closely watched as one of the first major companies to report earnings each quarter, is expected to announce Wednesday higher fourth-quarter net income, but a 5% to 7% drop in 2002 profits as overcapacity throughout the world continues to keep prices in a yearlong slump.

Average aluminum prices have been relatively stagnant at 61 cents a pound throughout the past year, five cents less than the average aluminum price in 2001. Although the price of aluminum on the world market inched up a penny last month, to 62 cents a pound, that slight increase wasn't reflected in Alcoa's fourth quarter, as it takes a month for a price change to filter down to the aluminum makers themselves.

Any price increase is welcome, but most analysts don't expect 2003 to be much better than 2002. "We continue to be cautious regarding the outlook for aluminum," said Daniel Brebner, metals analyst for UBS Warburg.

"While near-term strength is expected in aluminum prices, we expect poor fundamentals to result in an average of 62 cents per pound in 2003, a modest increase from 2002 average levels of 61 cents per pound." Mr. Brebner says he doesn't expect the aluminum business to show significant recovery until 2004 at the earliest.

Surplus Capacity

The big reason is overcapacity. While Alcoa this year idled about 200,000 tons of aluminum capacity at its Troutdale smelter in Oregon and Rockdale plant in Texas, other aluminum makers have either added capacity or announced plans to do so. Canada's Alcan Inc. said it plans to add capacity in its own country, and France's Pechiney SA is looking to build in South Africa or Australia.

Smelters in China and the Middle East have expanded this year to the point that China, formerly a net importer of aluminum, became a net exporter in 2002. More aluminum on the world market has effectively kept aluminum prices low and caused aluminum inventories to creep up, analysts said.

Indeed, aluminum inventories in the fourth quarter of 2002 grew significantly from a year earlier. In the final three months of 2001, the London Metals Exchange reported inventories in the range of 698,125 tons to 819,175 tons. In the final three months of 2002, the range was 1.24 million tons to 1.29 million tons.

Wall Street has pegged Alcoa to earn 25 cents a share for the fourth quarter of 2002. For the year-earlier quarter, Alcoa posted a loss of 17 cents a share, the company's first quarterly loss in nearly a decade. At the time, Alcoa pinned the loss on the impact of the Sept. 11, 2001 terrorist attacks, along with hefty restructuring costs, customer debt write-offs and a catastrophic power failure at one of its smelters. After excluding those items, which are considered part of continuing operations under generally accepted accounting principles, Alcoa said it would have earned 11 cents a share in the fourth quarter of 2001.

UBS Warburg is estimating that Alcoa will earn about 99 cents a share for all of 2002 -- about a 7% drop in profit from the company's earnings for 2001.

Aerospace Weakness

Alcoa's earnings were hurt by a continued weakness in the aerospace and the industrial gas-turbine businesses, which have been soft for much of 2002. Aerospace analysts aren't expecting two major airplane makers, Boeing Co. and Airbus Industrie, to recover significantly until 2005.

Alcoa was able to offset weaknesses in those two markets with its residential construction business, which has benefited from continued strength in home building, and its consumer-packing operations. Last year, Alcoa bought Ivex Packaging Corp., a food and medical-packaging business, which began contributing to earnings in the fourth quarter.

"It is really a mixed bag," said Wayne Atwell, metals analyst for Morgan Stanley Dean Witter. "We are expecting an OK but not great quarter," he added, referring to the fourth quarter.

At 4 p.m. in New York Stock Exchange composite trading Tuesday, Alcoa was unchanged at $24.38.