First quarter earnings season is beginning to roll around for many companies. Alcoa, Inc., a world-leading aluminum maker, is sitting pretty with a 59 percent rise in net profit. In numerical terms, it rose to $149 million/13 cents per share from $94 million/9 cents per share the quarter before. This impressive increase could be attributed to two factors: aluminum pricing and special items.
Aluminum prices were low as a result of excess supply in the market. As a result, many aluminum producers throttled back their production, and the supply levels fell back, which rose prices. Although companies such as Alcoa can be at risk for pricing of this commodity, this quarter demonstrated one of the instances where it could be beneficial.
These pricing effects contributed to approximately 15 percent of the increase in profit. There were many one-time events in this quarter that drove the vast majority of the increase in profit. These included a tax benefit, positive changes in the value of energy contracts and recovering of an insurance claim from a fire.
Klaus Kleinfeld, Alcoa’s chief executive officer, was incredibly pleased with the results and believes that there will be more good things to come. Kleinfeld believes that this earnings report reflects “a different Alcoa,” with aluminum pricing gradually becoming “less and less of a risk.”
To hedge potential side effects from aluminum price drops, Alcoa is beginning to focus moreso on later stage products, such as automotive design and parts for aerospace applications. Simply put, Kleinfeld said that “Alcoa is less and less about digging stuff out of the earth and melting it.”
In addition to shifting its specialties, Alcoa is closing expensive smelters, negotiating power supply contracts and upgrading technology. These strategies result in a much more profitable position for Alcoa.
Alcoa’s vital signs for the remaining months of the year look promising. Aluminum demand is expected to rise by seven percent this year, driven largely by growth in China and the expansion of the U.S. economy.
Alcoa’s CFO, William Oplinger, argued that despite this expected surge in demand, growth will also leave the supply of aluminum “essentially balanced.” In additon to aluminum, Oplinger perceives that demand from aerospace and auto industries will continue to be strong.
Alcoa is not a company that many people are well aware of as a result of its products being so close to the beginning of the supply chain. Yet, as a combination of their position and being one of the first companies to report earnings, it could be interpreted as very good news for a wide array of users of aluminum.
Alcoa serves producers of airplanes, cars, trucks, beverage cans and consumer electronics, all who rely heavily on aluminum. If sales are increasing for Alcoa, it could be inferred that these firms are also selling more of their product, or at least increasing production of inventory. Therefore, it could be possible that there will be promising financial results from other industries who rely heavily on Alcoa’s product.
So far, Alcoa is having a fabulous start to their fiscal year. If Kleinfeld and Opplinger’s outlooks on their company’s future hold true, great things can be expected out of the coming quarters.
Information from The Wall Street Journal was used in this report.