Alcoa’s earnings report tonight faces a tough “outlook” for the third-quarter at recent $0.88 per lb LME prices down from $0.982 averages in 1Q and $0.956 in 2Q.  The price drop takes about $200 mm of quarterly revenue away from smelter output of ingot.  We estimate that good currency shifts and cost controls offset about ¼ of the revenue drop.  A $400-$450 mm third-quarter EBITDA and breakeven to $0.05 third-quarter loss outlook follows from an estimated $576 mm second-quarter EBITDA and $0.10 per share profit.

                    We do not expect Alcoa’s earnings to please the general stock market on Tuesday.  Alcoa is much less of an indicator of the materials sector, and BHP Billiton, Vale and other nonferrous metals shares have replaced it.   

                     Chinese “bottom-fishing” opportunistic buying, supply restraint and continued strong auto production schedules benefit offtake, softening seasonal slowdowns that appear less than expected.  All six major LME commodities inventories again fell with aluminum down 21,340 tonnes, copper 17,786 tonnes, and nickel down 2,760 tonnes.  The four-week moving averages of inventory changes all six major nonferrous metals registered declines for the third straight week.  On July 9^th the Shanghai Futures Exchange warehouse stocks fell 7,099 tonnes for copper to 117,459 tonnes, 865 for aluminum to 495,934, and by 5,529 to 249,736 tonnes of zinc. 

 

Faithfully,

 

John C. Tumazos, CFA