Alcoa results prove analysts wrong

Alcoa announced their Q3 results overnight. The company reported earnings of $109 million after allowing for special items, or $44 million without those special items. (The biggest single special item was a restructuring charge, partly assigned to Primary Metals.)

According to the major media outlets, the consensus opinion was for a result of $0.13 cents per share. Alcoa came in at $0.07 per share after special items.

Alcoa reported that its average metal revenue was $1901 per tonne, well down from $2180 in the second quarter. LME prices closed the quarter at $1560, after opening at $1685 and tracking like a sailing ship in the doldrums in the intervening weeks. The point is that Alcoa was lucky in Q2 that the price didn’t start falling until around late May, giving them a reasonable average for the quarter. No such luck in Q3 2015. The full effect of the falling price and the collapse in delivery premiums came home to roost in Q3.

Some people have questioned why Alcoa chose to announce the split of the company when it did - just a couple of weeks before this result was announced. The inference was, Alcoa knew it would be a shocker, and putting the announcement out into the public domain ahead of the Q3 result would deflect some of the negative energy. I hope the motives were more upright than that - that as soon as it was able, it had to notify shareholders of its intentions.

The results certainly add fuel to the argument that Alcoa and others need to trim more capacity, despite what Alcoa says about market balance. Alcoa has predicted a slightly smaller global surplus for 2015, but still a surplus, and a shortage in 2016. But the Alcoa slides indicate that all the momentum is in China, with demand increasing at a rate double that of the rest of the world. That implies that for a shortage to occur in 2016, it has to come from closures of capacity in China. That’s a risky bet, and one which flies in the face of recent history or the near-term outlook.

Historically, China has been adding capacity every quarter bar one for the last 3 years at least. Right now there is still more capacity waiting in the wings or due to be completed in the coming months. Even if China were to close some old capacity, the resulting price breakout would only encourage idled capacity to re-enter. There’s no strong evidence to support a case that China is about to scuttle capacity, and until there is, there’s no reason to keep high-cost RoW smelters alive. Alcoa has said its review will go through to Q1 2016. Will it really take six months to decide to close high cost capacity, in a market where the revenue per tonne came in at $1901?