Aluminium maker Alcoa Inc. has announced its earnings for the December quarter and also its outlook for 2013.
But first, how did aluminium fare in 2012? Last year, global demand for aluminium is estimated to have risen by 6%, lower than the 10% growth it achieved in 2011 and 13% in 2010. The bright spots during 2012 were -- production cuts that limited oversupply, a softening of key raw material prices, and a sharp jump in regional metal premiums earned by aluminium producers.
Alcoa's December quarter results showed a slender improvement in sales on a sequential basis, but the profit front saw good news, with its adjusted Ebitda (earnings before interest, taxes, depreciation and amortization) margin doubling to 10% over the preceding quarter.
Alcoa also sees a brighter future for aluminium in 2013, with demand expected to grow by 7%. That may not seem like a very big increase, but is important as it marks the beginning of a recovery. This estimate assumes that European demand will continue to decline, but at a lower rate, and North America's growth will remain flat at 4%.
Emerging markets are thus expected to shoulder a major part of the burden, with China, Brazil and India seeing significant growth in demand. Any under-performance by these countries could throw that estimate out of gear.
There had been fears that forthcoming capacity additions would undo the effect of production cuts. In aluminium, Alcoa forecasts a 9.3% increase in production from new plants, but the increase in demand will restrain the surplus to 535,000 tonnes in 2013, compared with an estimated deficit of 262,000 tonnes in 2012. In alumina, a deficit of 200,000 tonnes is being projected.
A surplus situation in primary aluminium is a risk, but Alcoa takes comfort in the fact that global inventories have not increased in 2012, and regional premiums continue to be strong. That should ensure that metal prices remain steady.
Alcoa's results appear to indicate that Indian aluminium producers are likely to see their December quarter profitability improve on a sequential basis. Its rolled products and engineered products divisions, however, have not done well due to seasonal factors and flat trends in certain markets. That may mean that Novelis Inc., Hindalco Industries Ltd's Canadian subsidiary which sells value-added aluminium products, experiences similar headwinds.
London Metal Exchange aluminium prices continue to be volatile, though metal premiums are clearly playing a bigger role in influencing results. On the upside, a surprise can come from a flow of positive macro-economic news, while a key downside risk is from demand falling short of estimates, especially when there supply has increased. China was one of the main reasons why growth in 2012 fell below initial estimates, as it accounts for 46.5% of global aluminium demand, and to what extent its economy recovers in 2013 will determine the fate of Alcoa's estimates.
Distributed by MCT Information Services
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