Alcoa's earnings and the global economy

Alcoa (AA), the largest aluminium producer in the world is broadly viewed as one of the barometers of the global economy. Analysts often look at AA's earnings release for some hints of economic conditions.
The second quarter report was no exception. The shares price of AA fell about 2% preceding the release and did very little  after it.

Bulls on the global economy may have found assurance from AA's forecast. For the year, Alcoa projects aluminum demand to grow 12% on top of the 13% growth witnessed in 2010. What is better is that the optimism is broad based, including aerospace (7%), automotive (4-8%), commercial transportation (7-12%), packaging (2-3%), building and construction (1-3%), and industrial gas turbines (5-10%).  According to Alcoa, aluminum demand would double by 2020 from 2010 on 6.5% annual growth.

By segments,

Alumina - The shipments  increased 11.8% year over year to 2.4 million metric tons on production of 4.1 million metric tons.  The price of alumina jumped 7%.

Primary Metals - Shipments were 0.7 million metric tons, almost flat with the previous-year quarter. Pricing improved. Production increased by 5% year over year to 0.9 million metric tons.

Flat-Rolled Products - Shipments jumped 24.8% year over year to 0.4 million metric tons. Both Russia and China continued to see positive trends. Besides, third-party volumes were up 41% in Russia and 30% in China compared with the second quarter of 2010.

Engineered Products and Solutions - Shipments surged 23.9% year over year to 0.57 million metric tons. The segment’s strong results were marked by new product developments and productivity improvements.

Obviously all the above results were partially offset by higher energy and raw material prices.

Not everyone shared the optimism. Citigroup analyst, Brian Yu lowered his 2011 earnings estimate to $1.21 from $1.25 per share and his 2012 estimate to $1.35 from $1.43, citing higher-than-expected input prices. Yu estimates that cash costs in the company's primary metals group averaged $1.11 per pound in the second quarter. He notes that if other producers are seeing the same high prices, then current aluminum prices are too low to offset them. He believes these cost pressures are continuing in the third quarter.


My takes:
AA's earnings release echoed another economic bellweather Fedex (FDX)'s earnings release that indicated that impacts on profit margins were contained. However, if oil prices stay stubbornly above $80 for the rest of the year, smaller companies that do not have global presense may not be in the same shoes.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.



Disclosure: The blog author does not own any of the above positions in her personal account as of July 13, 2011

Potential Increase in Coal Imports to China

Amidst big sell-offs of material stocks, the possibility of reduced tariffs and port charges may offer a reason to feel a little better about coal companies or even a good opportunity to accumulate coal stocks before Chinese announcement for ardent coal bulls.

From Investors' Business Daily,

Yanzhou Coal Mining (YZC) and L&L Energy (LLEN) led a sell-off among China-based coal producers. But some U.S. coal producers gained ground, led by Peabody Energy (BTU) and Consol Energy (CNX).

China's miners fell on reports that the country's National Development and Reform Commission is "studying adjustments of VAT (value-added tax) and port charges relating to coal imports.

 "The country's energy commodity imports have declined recently, despite coal shortages and a looming electricity shortfall heading into the high-demand summer season. Analysts say lower tariffs and port charges could encourage more imports, helping hold down prices in China's tight coal market..........................

Although China does import U.S. metallurgical coal for use in steel production, chances are slim that it will turn to North America for more thermal coal, according to analyst Meredith Bandy with BMO Capital Markets. China likelier will buy coal from Australia and other sources that otherwise would end up in Europe. The Europeans probably would make up the difference via purchases from the U.S. Peabody could profit via the Australian and U.S. channels. "Peabody is the U.S. stock that would most directly benefit," Bandy said. "About half their value comes from Australian operations."

On the metallurgical side of the business, miners like Walter Energy (WLT) also face a potential windfall.

On the side, some analysts are betting on labor strikes in Australia to boost shares of coal companies.

Australian miners voted Thursday to give their unions the right to strike. The unions are in negotiations with BHP Billiton (BHP)-Mitsubishi Alliance, the world's largest producer of seaborne met coal."If this strike occurs — and we don't know that it will, but if it does — these met coal guys will probably go crazy," Bandy said.

Disclosure: The author of this post does not own any positions of the above mentioned stocks as of June 7, 2011

CLF plunged despite good earnings

The stock of Mining company, Cliffs Natural Resources (CLF) took a beating (of about 10% in the day following the earnings report) despite beating analysts' earnings estimates and offering very upbeat outlook on demand for its main product, iron ore and metallurgical coal.

Revenue in the first quarter rose to $727.7 million from $464.8 million a year ago while net earnings were $93.5 million, or 69 cents per share, compared with a loss of $7.4 million, or 7 cents per share, in the same quarter of 2009.

Iron ore pellet sales volume rose 116 percent to 4.4 million tons due to the boost to more demand as the North American steel industry has increased capacity utilization to between 70 percent and 75 percent in recent months. Iron ore price per ton rose 24 percent to $94.97

As a result of the recovery in steel industry, metallurgical coal sales volume rose to 662,000 tons from 494,000 tons, with average revenue per ton at $104.38, up from $95.34 a year earlier.

The management expected strong demand to continue in 2010 and it increased its sales volume estimate to about 27 million tons in North American iron ore, from 25 million tons.

In its North American coal business, Cliffs said it is maintaining its sales and production volume expectations of about 3.4 million tons in 2010

Very good report card. So, what gives?

 First, it has to be the broader market. The Dow had 2 triple digits down days in 3 days which was quite rare since the market rally started in February this year. The civil and potential criminal probe of Goldman Sachs together with sovereign debt fear in Europe spooked investors.

Second, what I would think is more relevant is new measures to crack down on real estates in China. If Chinese government is determined to slow down its economy, the biggest engine of global growth since the financial meltdown, the renewed recovery in demand for basic materials may die prematurely.

My takes

Chinese government is not as determined  to cool down on its economy as it appears. International Monetary Fund, IMF, is still expecting China to grow 10% in 2010 and 9.9% in 2011. In addition, global economy, especially the US is recovering, albeit at a moderate space, thus contributing to upcoming demand for basic materials. Steel industry, for example, has increased its utilization significantly from last year to 70-75% year to date. With the auto industry recovering quickly this year and housing market slowly stabilizing and strengthening, steel industry is expected to strengthen further, adding to the demand for iron ore and metallurgical coal.

CLF stands to take advantage of this recovery. Once the stock price finds its footing, it offers a good buy.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.



Disclosure: The blog author does not own any position of CLF in her portfolio as of May 2, 2010

Coal Price Forecast 2010-2011

Analysts mostly expect a rise in coal prices in 2010 and 2011, especially metallurgical (coking) coal, citing recovery in the global economy and tight supply.

Coal Prices may Head Up

• UBS analyst Henry Kirn and Citi Investment Research analyst Brian Yu both expect higher coal prices in 2010 and 2011.
• Yu expects prices for coking coal will settle at $200/ton in 2010 and 2011, up from earlier forecasts of $140/ton. Latest available data from the Energy Information Administration (EIA) has coking coal selling for $137/ton.

World coal price expected to increase

• Analysts at Macquarie Bank expects an average world seaborne coal spot-price increase of 15% this year to $82.50/metric ton from $71.75 in 2009 while Merrill Lynch forecasts a 20% hike to $86.
• Neither forecaster sees prices spiking back to the $127 level of 2008.
• Macquarie analyst Carol Cao says in a research note that the recent 30% spot coal price surge to $100/metric ton "has been largely due to weather issues," and she expects to see lower spot prices at the end of winter. Still, winter costs are rising; Macquarie says internal Russian coal transport costs have risen to $75/metric ton to ports in both the Baltic and the Pacific, which will cause winter export prices to rise soon.
• With the world coal price increase, the risk of a new resources tax and slim chances for a tariff hike in the first half of 2010, Merrill Lynch analysts also think Chinese independent power producers will face a "material margin squeeze" at least in the winter of 2010.
• Fitch Ratings expects only a "modest increase" in domestic steam coal prices in the second half of 2010 from the $53 average of 2009 on partial recovery in domestic industrial power demand and less gas for coal substitution.

World coking coal prices seen rising
 

• Scotiabank economists predict that the cost of coking coal will increase by 31% this year to $169/metric ton in benchmark Asian markets from an average $129 in 2009.
• J.P. Morgan Securities is slightly less bullish, projecting 24% inflation to $160/metric ton.

Steel hope for 2010

The World Steel Association said Monday that steel consumption in the industrialized world won't be as weak as it thought. The global recovery is stronger than the group has predicted in April.


The trade group said it now believes that global steel use will decline by 8.6% in 2009 compared with a year ago. Back in April, the association had predicted a 14.5% drop.

The group also predicted that worldwide demand for steel will grow by 9.2% in 2010, which would put the globe's steel consumption back on equal footing with 2008 levels.

China once again was cited as the driver. China's demand for steel will likely grow by 19% in 2009 and 5% in 2010.


Recovery in North America will come more slowly, according to the report, with a demand decline of 35.8% in 2009 before a rebound of 17% in 2010.


You may also be interested in articles in the same category:
http://cocacolabuffet.blogspot.com/search/label/Steel

http://cocacolabuffet.blogspot.com/search/label/Commodities

Gold going to $2000?

To view the video clip by Tech Ticker with Jim Rogers, click here


Famed investor Jim Rogers is "quite sure gold will go over $2000 per ounce during this bull market."

Rogers' confidence gold will continue to rally stems from a view the U.S. dollar is on its way to losing status as the world's reserve currency.

"Is it going to happen? Yes," Rogers says. "I don't like saying it [and] I'm extremely worried about it but we have to deal with the facts. America is not getting better [and] the dollar is going to be replaced just like pound sterling [was]."

Rogers didn't offer a timetable, and it's likely gold would exceed $2000 per ounce if the dollar were to lose its reserve status.

Still, "I wouldn't buy gold today," Rogers says. "I think I'll make more money in other commodities, which are cheaper," as discussed in more detail here.

Among many others, Rogers is "worried about the fact the U.S. government is printing huge amounts, spending gigantic amounts of money it doesn't have," the investor and author says. "People are very worried [and] skeptical about paper money [and] looking for places to protect themselves. The best way is to buy real assets. [That] has always protected one during currency turmoil, and it will again."

Inflation Inevitable?

In an interview with Rogers by Tech Ticker (For Video Clip, click here), Rogers expressed the following concern:

Given the Fed's extremely easy policies, runaway government spending and shortages of many commodities, inflation pressures are building and destined to get much worse, according to famed investor Jim Rogers of Rogers Holdings.


"The Federal Reserve has laid the groundwork for some serious inflation down the road by printing all this money," Rogers says. "So have many other central banks."

Although "the U.S. government lies about inflation" in its official data, inflationary pressures are already evident in nearly everything, excluding energy, Rogers says. Inflation is "going to continue, going to accelerate," he says. "We're going to be paying more for just about everything down the road."

Asked if he foresees a 1970s-style stagflation period ahead, Rogers chuckled and gave an ominous reply: "I hope it's that good. It might be much, much worse."

Given that view, Rogers remains very bullish on commodities as we discuss in subsequent clips.

Alcoa Lifts Commodities

The first Dow component to report earnings this quarter, Alcoa Inc (AA) posted a surprise profit on Wednesday through cost cutting and higher aluminum prices after three consecutive quarterly losses, sending its stock 6 percent higher. Wall Street had expected another loss for the aluminum producer but Alcoa said its third-quarter net earnings were $77 million, or 8 cents per share, compared with earnings of $268 million, or 33 cents per share in the same quarter of 2008. The stock,together with other commodities-related stocks rose in extended hour trading.

• Blowing away Estimates

"Excluding restructuring and one-time items, the profit was $39 million, or 4 cents per share -- smashing analysts' average forecast of a loss of 9 cents per share, according to Thomson Reuters I/B/E/S.

Revenue fell to $4.6 billion from $7.00 billion a year earlier, but was 9 percent higher than the second quarter and higher than analysts' average estimate of $4.55 billion, according to Thomson Reuters I/B/E/S."

• Cost Cutting and Aluminium Price

"Alcoa attributed the positive results to cost savings and an increase in aluminum prices. Kleinfeld said the company's cash sustainability initiatives to reduce costs by $2 billion by 2010 had exceeded targets and reached $1.6 billion.

During the third quarter, the London Metals Exchange price for aluminum rose 16 percent to $1,890 per metric ton. Alcoa said its realized prices for primary aluminum in the third quarter rose to $1,972 per metric ton from $1,667 in the second quarter. On Wednesday the LME three-month price was $1,850."

• Things are Getting Better but Not Good Enough

"Alcoa, which has curtailed metal production by more than 20 percent and cut its workforce by about 30 percent since the economic downturn began a year ago, said there are signs that key markets are stabilizing and it expects global consumption to rise by 11 percent in the second half of this year.

But Chief Executive Officer Klaus Kleinfeld said metal prices and demand had not yet improved enough to restart smelter production that had been cut back.

"We believe that current prices are not conducive to any restart," he said when asked on a conference call with Wall Street analysts.

Kleinfeld said although the beverage can market was expected to remain stable, the aerospace market would continue flat, commercial building and construction was in decline and the market for industrial gas turbines was weakened.

Although the U.S. cash-for-clunkers program had stimulated the auto industry this summer, sales fell off in September, he said."

Disclaimer: Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.


Disclosure: The blog author does not own AA in her personal account as of October 7,2009