Alcoa's Situation Worsens with Quarterly Net Income Loss of $1.19 Billion

On January 12, Alcoa (New York, NY) closed its 2008 fiscal year in dismal fashion by announcing a 4Q08 net income loss of $1.19 billion. According to Industrial Info Resources (Sugar Land, TX), the company pointed to historically low aluminum prices and decreased product demand as the reasons for the quarterly figures. "The aluminum industry is caught up in a perfect storm of historic proportions," said CEO Klaus Klienfeld. "The price has never before fallen so fast. As demand disappears, inventories are building and prices are decreasing. In addition, inventory levels are affected by the tight credit markets and as speculators and traders liquidate their positions and play physical metal on the exchanges."

During the quarter (October 1 to December 31, 2008), aluminum prices declined 35 percent. Prices had already plummeted in the previous quarter and fell 56 percent from July 2008 to the end of the year. Alcoa's 3Q08 income dropped 52 percent year over year, causing the company to announce substantial curtailment of capital expenditure. The company's fourth quarter results represented an even further decline. Alcoa operates in four business segments, all of which showed declines in after-tax operating income from the third quarter:

In addition to reducing capital expenditure, Alcoa recently announced planned reductions in its workforce, with plans to eliminate 13,500 employees, or 13 percent of the company's workforce, by the end of 2009, as well as 1,700 contractor positions. The company has also announced a total of reduction of smelting output of 750,000 metric tons per year, representing about 18 percent of the company's annual output. These include curtailments at the company's plants in Rockdale, Texas, and Alcoa, Tennessee.

Not all capital expenditure has stopped, however. Certain projects in Brazil will be completed. Chief Financial Officer Charles McLane Jr. commented on these projects: "As to growth capex, we have halted those projects where it is economically practicable to do so. The largest ongoing projects reside in Brazil and pertain to the offsite mine in Juruti, the refinery expansion of Sao Luis and the hydro projects. We individually reviewed each project and evaluated the option of halting construction. The cost benefit analysis determined that stopping the projects would be value-destructive for the company. We therefore charged the team with completing the projects as soon as possible and as cash-efficiently as possible."

www.alcoa.com

Courtesy of Industrial Info Resources, Sugar Land, TX