Alcoa Inc said it will cut its global smelting capacity by 12 percent due to a steep drop in aluminum prices, and the company is taking a restructuring charge in the fourth quarter that will push it into its first loss in nine quarters.
Alcoa said on Thursday it will close its Alcoa, Tennessee, smelter and two of six idled potlines in Rockdale, Texas to reduce global smelting capacity by 291,000 tonnes per year, or 7 percent.
A further 240,000 tonnes, or 5 percent, will be curtailed elsewhere, it added, without saying how many other plants or how many employees were affected. The news pushed Alcoa's shares down 17 cents to $9.19 in after-hours trading.
"These are difficult but necessary steps to improve Alcoa`s competitiveness, preserve and grow shareholder value and protect jobs in the rest of the Alcoa system," said Alcoa Chairman and Chief Executive Officer Klaus Kleinfeld.
The company, the largest U.S. producer of aluminum, said it will take restructuring charges of $155 million to $165 million, or 15 cents to 16 cents per share, in the fourth quarter. That is certain to knock Alcoa into red-ink territory - a victim of slow demand and slumping prices for aluminum.
Prior to Thursday's announcement, the average Wall Street estimate for Alcoa's earnings per share was 1 cent, according to Thomson Reuters I/B/E/S. In the same quarter of 2010, Alcoa's profit was 21 cents per share.
Equity research firm Starmine, which gives more weight to estimates from analysts with a more accurate track record, had forecast Alcoa to post a loss of 4 cents per share. That would be the company's first loss since the second quarter of 2009.
At least 15 Wall Street analysts have cut their fourth-quarter earnings estimates in recent weeks for Alcoa, which is scheduled to announce results on Monday after the market close -- the first Dow component stock to report.
Prices of aluminum, which is used for automobiles, aircraft and household appliances, fell 18 percent last year and 6 percent in the fourth quarter. Traders cited the Euro zone crisis and a slowdown in China, a key consumer of aluminum, for the drop in prices.
Prospects for swift improvement in the new year were clouded as the price of aluminum fell 1.93 percent to $2,036 per tonne on Thursday.
"You can't make money at that price," said analyst Charles Bradford, of Bradford Research. "Even the Chinese are closing smelters."
But he said he was surprised by Alcoa's move since the company had recently just re-opened some capacity. "That must imply they are looking at a much weaker supply picture."
In October, Alcoa chief Kleinfeld said he still expects a near doubling of aluminum demand in the next 10 years, driven largely by China and emerging markets. But he also noted weak economic conditions, particularly in Europe, because confidence in the global recovery has faded.
That has sapped aluminum demand from the automotive, industrial products, construction and packaging sectors since the second quarter, with only the aerospace and transport sectors growing, he said.
"We have seen a weakening trend in the last few months and it will show in the results," said Bridget Freas of Morningstar in Chicago. "Most analysts are blaming what has happened with the LME (London Metals Exchange) price and we ended the year on a low point."
Another analyst, Davenport & Co's Lloyd O'Carroll, was bullish on Alcoa, predicting that aluminum prices will rise in 2012. Although he lowered his fourth-quarter earnings estimate to 2 cents per share from 4 cents, he reiterated his "buy" rating and $18 share price target for Alcoa.
"Higher prices, along with strength in key end markets such as aerospace and autos, should take Alcoa higher," he said.
Two other U.S. aluminum companies, Kaiser Aluminum and Century Aluminum have also seen their shares drop in the last six months. Century is also expected to post a fourth-quarter loss.