NEW YORK — Investors should be more worried about the U.S. debt ceiling than Alcoa Inc.’s free cash flow, chairman and chief executive officer Klaus Kleinfeld told AMM, noting that economic sentiment means everything when it comes to aluminum prices.
"The big issue for 2013 is the debate on the U.S. debt ceiling, which is potentially more damaging than the actual event. The debate has been going on for too long ... it chews everyone’s confidence," he told AMM.
"The U.S. is not really a problem, in general, because the fundamentals are actually pretty good; automotive and aerospace have been growing, and building and construction is turning around. So what could stop that? One big thing, the destruction of confidence, of the infusion of fear," Kleinfeld said.
"One day we’re talking about the fiscal cliff and the phrase itself sounds very threatening, and the next moment we resolve things by replacing it with being afraid we’re hitting the ceiling. Both things are deadly, and in a way that’s the biggest risk here," he said. "(The debt ceiling) is really in the hands of the representatives and administration to resolve that, and if we get it resolved I’m optimistic we’re going to have nice growth—the fundamentals are there."
Just as sentiment toward the economic outlook was dragged lower last year as the threat of a U.S. fiscal cliff loomed, Alcoa is now finding the very idea that the aluminum producer could be downgraded to "junk" status an unfounded distraction in certain circles.
New York-based ratings agency Moody’s Investors Service Inc. at the end of 2012 put Alcoa on review for a possible downgrade, citing the "challenging headwinds" faced by the company—namely weak aluminum prices.
"We do not see a material, sustainable improvement in aluminum prices over the next several quarters and expect Alcoa’s earnings performance and debt-protection metrics to remain challenged," Moody’s said at the time.
Yet despite low aluminum prices, Alcoa generated full-year net income and met all of its cash sustainability targets for the fourth consecutive year, ending 2012 in a strong cash position (amm.com, Jan. 8).
The review applied to all of Alcoa’s $8.3-billion in debt, which it has since cut to $7 billion.
However, Alcoa’s current balance sheet is stronger now than it was in 2008, while its net debt is at its lowest since 2006, prior to the economic downturn, according to Kleinfeld.
"The overreaching 2013 financial target focus remains on positive free cash flow," he said.
"The LME aluminum price is very much trading on general economics and sentiment," Kleinfeld said.
"If China comes back, if Europe continues to muddle through in this better-than-expected way, if the U.S. debt ceiling issues are finally resolved, then we’ll absolutely see a rebound in prices," he said. "The markets gained confidence at year-end, when the fiscal cliff crisis was averted and rebounded, showing that it’s not the fundamentals that are driving prices, as they’re already pretty positive. It’s sentiment."
But whether sentiment improves in 2013 remains to be seen.
"I personally believe there are more arguments that sentiment will improve than against it," Kleinfeld said, basing this view on recovery not just in Asia, but in Europe and the United States.
Asia, driven by China, is "clearly coming back" now that the leadership transition has happened and the stimulus package is in place, he said.
Europe’s strength was a "big surprise to me," Kleinfeld said, with the region exhibiting an uncanny ability to "muddle through" its issues despite the markets talking it down.