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
"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 everyones confidence," he told
"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 were 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 were hitting the ceiling. Both
things are deadly, and in a way thats 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 Im optimistic were going to have
nice growththe 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
Moodys Investors Service Inc. at the end of 2012 put
Alcoa on review for a possible downgrade, citing the
"challenging headwinds" faced by the companynamely weak
"We do not see a material,
sustainable improvement in aluminum prices over the next
several quarters and expect Alcoas earnings performance
and debt-protection metrics to remain challenged," Moodys
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
Alcoas $8.3-billion in debt, which it has since cut to $7
However, Alcoas 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
"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
well 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 its not
the fundamentals that are driving prices, as theyre
already pretty positive. Its 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.
Europes 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.