Alcoa profit seen higher on aluminum price surge

By Steve James

NEW YORK (Reuters) - Alcoa Inc <AA.N>, often viewed as a bellwether of the U.S. economy, is looking at a big jump in second-quarter profit as a result of soaring aluminum prices and growing demand, especially from planemakers.

"When you compare year-over-year, the second quarter will be a lot higher, and most of that is in volume improvement," said analyst Bridget Freas, of Morningstar in Chicago.

"Aluminum prices are a lot higher, and the upward trend of the first quarter reflects improvements in end-markets."

She noted metal prices are 5 or 6 percent higher than in the first quarter, which was Alcoa's best quarter since the end of 2008.

Aluminum was selling in a range of $2,500 to $2,600 a tonne on the London Metal Exchange during the second quarter, up from $1.977 in the same quarter a year earlier.

"They might have some offsetting factors, such as foreign currency, which likely will hurt them," Freas said. "But they have landed some nice deals recently, like Airbus, and they have done a good job of cleaning up their cost structure."

Fraser Phillips, of RBC Capital Markets, said higher prices and volumes were certainly driving Alcoa's increased profit, but costs remain challenging.

"The gains should be partly offset by the negative impact of currency and higher energy and raw materials costs," he wrote in a research note.

Phillips said he expected second-quarter profit to improve to 33 cents a share from 28 cents a share in the first quarter and 13 cents a share in last year's second quarter. Analysts on average are expecting 34 cents per share, according to Thomson Reuters I/B/E/S, with revenue rising more than 20 percent to $6.3 billion.

Phillips said higher average aluminum prices in the second quarter should boost profit by 6 cents a share. But currency movements will have a negative impact, he said, noting the Australian and Canadian dollars, the Brazilian real and the euro all strengthened relative to the U.S. dollar, which should decrease earnings per share by 2 cents.

Profit should also be reduced by about 6 cents per share by increased energy and raw material costs for alumina -- which is smelted into aluminum -- as well as primary metals and flat rolled products, Phillips wrote.

Charles Bradford, of Bradford Research in New York, said the consensus of Wall Street analysts had come down a little in recent weeks. "They had a good quarter, but not as good as some people thought," he said. "Mostly it was due to currency fluctuations, but they are still driven by the metal price."

Alcoa said its results, due on Monday, July 11, shortly after the market closes, will recognize an after-tax net charge of about $30 million on the early retirement of debt

In an interview with Reuters in May, Chief Executive Klaus Kleinfeld said he expected aluminum prices to keep climbing and demand for the metal to likely double in the next decade.

He said Alcoa still expects global aluminum demand to grow by 12 percent this year and to double in the next 10 years as customers like auto and plane manufacturers use more of the lighter-weight metal for their products.

Alcoa recently announced a deal worth about $1 billion to supply its new, lighter aluminum-based alloys for Airbus commercial aircraft.

Alcoa said the deal with the European planemaker unit of EADS <EAD.PA> calls for aluminum sheet and plate using current and advanced-generation aluminum alloys, which are lighter and stronger than traditional metals and composites.

(Reporting by Steve James, editing by Matthew Lewis)