Alcoa Inc (AA.N: Quote) was cautiously optimistic Tuesday when it said it saw signs of bottoming or stabilizing in its end markets, but it continues to project weak global demand for 2009, with another 1.4 million tonnes of aluminum supply cuts in the near term.
Heavy inventory destocking throughout Alcoa's supply chain, its customers and their customers, has pushed inventories to unsustainbly low levels, and should cause a rapid pick-up in orders when the economy turns, company executives told a conference call after reporting first quarter results.
There are some signs in many of our end industries for bottoming out, said Klaus Kleinfeld, president and chief executive officer of the world's largest aluminum producer.
That would be a good sign for the company, which posted its second straight quarterly loss on Tuesday, as aluminum prices and global demand tumbled in the prolonged recession.
The Pittsburgh-based company reported a first-quarter net loss of $497 million, or 61 cents per share, compared with a profit of $303 million, or 37 cents per share, in the same quarter of 2008.
Citing 24 percent year-on-year inventory declines at metal service centers as an example, Kleinfeld said, We believe that is way beyond normal levels. If there is an upside, it's that, if people start to smell the market bottoming out or coming back, there might be quite a bit of activity.
But many sectors have also had to contend with tighter credit conditions, which has hampered their ability to operate, including aluminum consumers.
Most people were in a position that if they have anything, in a working capital nature, they can liquidate, and in this environment they are liquidating it, Chief Financial Officer Chuck McLane said.
Kleinfeld expects declines in Alcoa's end markets and current high primary aluminum inventory levels leading to a 7 percent decline in 2009 global aluminum demand, or 34.5 million tonnes, after a 3 percent global demand decline in 2008.
Market conditions will remain tough throughout the year with Alcoa currently projecting global auto industry sales falling 18 percent, with U.S. sales down 25 to 30 percent.
However, Kleinfeld was optimistic.
In the U.S., the CEO said, we are seeing the first signs of the market stabilizing at a lower level.
The global trucking market was projected to slip 15 to 20 percent in 2009, but freight tonne miles and order rates seemed to be stabilizing, he said.
He said the U.S. residential market might be seeing some signs of bottoming out, and Alcoa forecast a 35 to 40 percent U.S. sales decline, but only a 10 to 15 percent drop globally.
With air travel down 6 percent, Kleinfeld said, replacement of spare parts should be lower in the aerospace industry, with a possible negative impact on build rates in 2010.
Beverage industry packaging, which tends to be impervious to economic downturns, was seen declining only slightly.
Regionally, Alcoa expects China's 2009 aluminum consumption to eventually move in balance with supply, though Europe and North America should each show demand declines of 15 percent.
China now runs a supply/demand deficit, and in our view will maintain a self-sufficient aluminum industry at least on a short to mid-term basis, and eventually return to balance, Kleinfeld said.
With the rest of the world in surplus, however, Kleinfeld said he expected another 1.4 million tonnes of primary production to come off line in coming months. (Additional reporting by Steve James. Editing by Bernard Orr)
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