Alcoa announces major cost-cutting actions
Analysts don't see cuts boosting ingot prices
By Tom Stundza -- Purchasing, 1/7/2009 5:44:00 PM
Alcoa this week announced a series of cost-cutting moves--from reducing capacity to cutting roughly 13% of its global work force to selling four downstream businesses--as it addresses the global economic downturn, drop-off in aluminum purchasing and slide in aluminum prices.
However, the actions aren’t enough to rally aluminum ingot back to the $1.17/lb average of 2008, says analyst Michael Gambardella at J.P. Morgan Securities in New York. The aluminum ingot price this week is 71¢/lb and the analysts’ consensus forecast for the year still is 80¢. Analyst Charles Bradford of Bradford Research/Soleil Securities also tells the Associated Press that Alcoa's production cuts will not help put a floor under aluminum prices. Broader production cuts are needed by Alcoa and its competitors, such as Rio Tinto Group and aluminum producers in China, Bradford says, as prices are unlikely to stabilize unless more drastic steps are taken.
“These are extraordinary times, requiring speed and decisiveness to address the current economic downturn, and flexibility and foresight to be prepared for future uncertainties in our markets,” CEO Klaus Kleinfeld says in a statement. “We are taking a wide-ranging set of aggressive, but prudent, measures to ensure that Alcoa maintains its competitive lead in today’s challenging markets while also emerging even stronger when the economy recovers.”
The company will reduce smelting by 135,000 metric tons/year, which will bring overall cutbacks to 750,000 metric tons/year, or 18% of annualized capacity. However, the new smelting production cuts of 135,000 metric tons represent about 3% of Alcoa's total capacity and about 0.3% of global supply, says Gambardella, which “will likely have very little, if any, impact on global aluminum prices.”
Alcoa also intends to divest four non-core downstream businesses--electrical and electronic systems, global foil, cast auto wheels and European transportation products--which had 2008 combined revenues of $1.8 billion and employ a combined 22,600 people at 38 locations.
Among other cost-cutting actions, including new power contracts at its smelters in Quebec, Alcoa intends to reduce payments for energy, coke, caustic soda and aluminum fluoride raw materials by sourcing from alternate suppliers globally. The company says “these actions are expected to yield savings of greater than 20% in each of the materials.”
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