Alcoa Strengthens Productivity in 2012, Fighting Sharp Decline in Metal Prices

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Researched by Industrial Info Resources (Sugar Land, Texas)--Aluminum producer Alcoa Incorporated (NYSE:AA) (Pittsburgh, Pennsylvania) endured a turbulent market throughout 2012 as the global economy remained unstable and the realized price of aluminum fell sharply. Net income for the fourth quarter was reported to be $242 million, compared with a $191 million net loss in the fourth quarter of 2011, while net income for the year was reported to be $191 million, compared with $611 million in 2011.

Total sales stood at $5.9 billion for the quarter, a 1.52% decrease from the same period in 2011, and $23.7 billion for the year, a 5.01% decrease from 2011. Aluminum prices fell 12%, affecting the metals market by about $1 billion, although they improved in the fourth quarter. However, the company's midstream and downstream business reported record after-tax operating income for the quarter. A significant portion of the earnings came from the closing of the sale of the Tapoco hydroelectric project in Tennessee, which boosted after-tax revenues by $161 million.

Capital expenditures were $398 million for the quarter, compared with $486 million in the same period of 2011. For the full year, capital expenditures stood at $1.26 billion, compared with $1.3 billion in 2011.

Industrial Info is tracking more than $4 billion in active projects involving Alcoa, including the $300 million expansion of an aluminum works facility in Riverdale, Iowa. The project involves expanding production to about 11 million metric square feet to meet supply demands from the automotive market for light-weight aluminum. The project is expected to be completed in December 2013.

"We had cost increases in maintenance, supplies and services; labor inflation, especially in emerging markets around the world; higher transportation costs, mostly because of fuel oil; and higher pension costs," said Chuck McLane, the executive vice president and chief financial officer of Alcoa, in a conference call. "Yet, we had significant productivity of $786 million that more than offset the cost increases and went to the bottom line of the company. When you combine the extraordinary productivity efforts with the positive impact of volume price and mix, we generated $1 billion of performance during the year. These actions overcame the $670 million in cost headwinds that challenged us in 2012 and helped mitigate the negative impact of lower metal prices."

The pricing problems faced by Alcoa could be most clearly seen in the results from the Alumina segment, where the after-tax operating income was dramatically lower for both the quarter and the year. The Flat-Rolled Products and Engineered Products segments, however, showed noticeable improvement:

• The Alumina segment reported $41 million in after-tax operating income for the quarter, compared with $125 million in the same period in 2011, and $90 million for the year, compared with $607 million in 2011.
• The Primary Metals segment reported $316 million in after-tax operating income for the quarter, compared with a $32 million net loss in fourth-quarter 2011, and $309 million for the year, a 35.76% decrease from last year.
• The Flat-Rolled Products segment reported $69 million in after-tax operating income for the quarter, compared with $26 million in the same period in 2011, and $358 million for the year, a 34.59% increase from 2011.
• The Engineered Products and Services segment reported $137 million in after-tax operating income for the quarter, a 12.3% increase from fourth-quarter 2011, and $612 million for the year, a 13.54% increase from last year.

Alcoa executives believe that global aluminum demand will grow about 7% in 2013, which was the same prediction they made for 2012 in the first quarter of that year, although last year ended up seeing a 6% growth. The company also believes that in 2013, the global aerospace market will grow between 9% and 10%; the automotive market will grow between 1% and 4%; the building and construction market will grow between 4% and 5%; and the industrial gas turbine market will grow between 3% and 5%.

"In the decade from 2012 to 2020, we believe demand is going to double," said Klaus Kleinfeld, the chairman and chief executive officer of Alcoa, in the conference call. "For demand to double, you basically need an average growth rate of 6.5% [per annum]. We so far have been having an average growth rate of 8.5% per annum."

For more information, visit Industrial Info's International Metals & Minerals Project Database.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.