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Workers at a factory in Huaibei, China, package sheet aluminum.

Alcoa Bid to Stem Losses Runs Into World Awash in Aluminum

Jan. 16, 2020
Global aluminum production is predicted to exceed demand by as much as a million metric tons in 2020.

Alcoa Corp.’s bid to stem a year-long profit slide isn’t getting much help from China.

The top U.S. producer of aluminum sees global production of the metal outstripping demand this year, adding more gloom to a slumping commodity and giving more urgency to a cost-cutting drive after a fourth straight quarterly loss. The surplus will be fueled by production in China, according to the company’s forecast.

The outlook comes as Alcoa takes steps to counter weak prices by shedding assets and getting leaner, saying in October it would sell non-core businesses to generate as much as $1 billion in net proceeds. Aluminum prices have slipped amid trade tensions and a slowdown in manufacturing worldwide, and Alcoa’s forecast suggests further declines may be in store.

“China overcapacity remains a problem for the aluminum market with no change on the horizon,” Jefferies LLC analysts including Christopher LaFemina said in a note. “While Alcoa is taking actions to cut costs and drive productivity, weak aluminum market fundamentals and a lack of free cash flow are concerns.”

Alcoa on Wednesday projected global aluminum supply will exceed demand by as much as 1 million metric tons in 2020, fueled by production in China. That compares with a deficit last year of 900,000 tons to 1.1 million tons. The manufacturer also reported a wider-than-expected adjusted loss for the fourth quarter.

Worldwide demand growth will be in a range of 1.4% to 2.4% this year. The company’s final aluminum estimate for 2019 was a decline of 0.2% to 0.4%.

Still, the increase in demand won’t be enough to absorb excess supply.

“In aluminum, Chinese overcapacity continues to challenge the global market,” Alcoa Chief Executive Officer Roy Harvey said on the company’s earnings call with analysts Wednesday. “The excess supply of Chinese semis will be exported to the world,” effectively displacing primary aluminum in those markets, he said.

The so-called phase one trade deal the U.S. signed with China on Wednesday may be cause for optimism.

“There are catalysts for positive change,” Harvey said, citing “recent developments that we’ve seen with China, and particularly if we start to advance toward a phase two part of the deal. I think that gives us the catalyst for improvements happening more quickly.”

Alcoa’s statement was released after the close of regular trading in New York on Wednesday. The company’s shares were down 2.4% at 8:07 a.m. in pre-market trading.

By Joe Deaux

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