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FINANCIAL TIMES - Alcoa upbeat on growing aluminium demand

Published:Wednesday | January 14, 2015 | 12:00 AM

By Ed Crooks in New York

Alcoa, the US aluminium group, expects sustained growth in demand for aluminium this year, with particular strength in aerospace and automotive, the company said as it reported results for the fourth quarter of 2014 that were significantly better than analysts' forecasts.

Klaus Kleinfeld, chief executive, said the regional premiums that are paid over the financial market price of aluminium by customers for the physical metal had been large, suggesting healthy demand, and seemed likely to remain robust.

He also suggested on a call with analysts that the fall in oil prices could be a significant benefit to Alcoa this year. Each US$10 drop in the price of a barrel of oil would add about US$40m to net income, thanks to cheaper energy at the company's two oil-fuelled smelters, and lower transport costs.

Mr Kleinfeld was speaking as the company reported underlying net income, excluding one-off items, of US$1.1bn for full year 2014, more than triple its level in 2013, thanks principally to a dramatic recovery in the performance of its commodity primary metals division.

Underlying earnings per share, excluding one-off items, were 33 cents in the fourth quarter, well ahead of analysts' expectations of 27 cents.

Alcoa lost US$20m on primary metals in the full year 2013, but made a profit of US$594m in 2014, after continuing its efforts to drive down costs. The company has closed or sold 31 per cent of its smelting capacity since the start of the financial crisis, and last year opened low-cost capacity in its new joint venture in Saudi Arabia.

Mr Kleinfeld said the Saudi operations were now the world's most competitive source of aluminium, adding: "There is nobody that has a lower cost position than that."

As those operations ramp up, and Alcoa takes other actions including possible cuts at its plant in Suriname, Mr Kleinfeld said he hoped to push the company's average costs further down relative to its competitors.

Alcoa expects a 7 per cent rise in global demand for aluminium this year, the same as last year, with a 10 per cent increase in China and 4 per cent rise in the rest of the world. The company's forecast suggests demand for building and construction in China will grow by 7-9 per cent this year, in spite of concerns about the country's property market.

Although the largest swing in profitability came in the commodity side of the business, Alcoa has been investing most heavily in its specialised metals and products, including the US$3bn acquisition of Firth Rixson last year. There was a 6 per cent increase to US$767m in after-tax operating income from engineered products and solutions, which tends to have more stable earnings.

Alcoa's debt was downgraded to junk status in 2013, but last year it showed a strong improvement in its financial position on many measures including reporting earnings before interest, tax, depreciation and amortisation of more than US$3bn, which was one of the indicators being watched by rating agencies. It reported adjusted ebitda of US$3.56bn.

This year Alcoa expects to report cash flow from operations in excess of its capital spending, William Oplinger, chief financial officer, said. He added: "It is a priority for us to get back to investment grade, and I think we're doing all the right things to get there."

(c) The Financial Times Limited 2015.