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More Alcoa production cuts possible

Keywords: Tags  Alcoa, Klaus Kleinfeld, William Oplinger, earnings, conference call, smelter, capacity curtailment, primary aluminum aluminum prices

CHICAGO — Alcoa Inc. may consider further capacity cuts at facilities that operate at a loss despite a forecast aluminum shortage, company officials said.

Alcoa’s smelting capacity will be slightly less than 3 million tons per year once all announced cuts are put in place vs. roughly 4.1 million tonnes in 2007.

The production cuts are aimed at moving the company from the 43rd percentile of the cost curve to the 38th percentile by 2018, Alcoa chairman and chief executive officer Klaus Kleinfeld said during an earnings conference call with analysts April 8. "We have acted very, very fast and very drastically. This was painful but it was necessary, and we will continue to monitor the environment and act accordingly."

The facilities that have been targeted for closure or cutbacks are losing money, so their curtailment or idling should reduce Alcoa’s average cost of production, he said.

JPMorgan Securities LLC analyst Michael Gambardella asked whether any of Alcoa’s other operating smelters were losing money. Kleinfeld declined to say, but pointed to the results of the company’s primary metals segment, which posted an after-tax operating loss of $15 million on production of 839,000 tonnes in the first quarter in contrast to after-tax operating earnings of $39 million on production of 891,000 tonnes in the same period a year earlier.

"It all depends on where the market is going, and we are committed to making money," Kleinfeld said. But he declined to discuss specifics, arguing that it was "not helpful" to do so publicly before potentially affected parties have been consulted.

Kleinfeld said that Alcoa had sought other ways to reduce costs besides closing facilities, pointing to the company’s successful efforts to renegotiate power contracts for its smelters in Canada (, Feb. 25).

Also helping the Pittsburgh-based aluminum producer’s primary metals business were "favorable" regional product premiums, including the Midwest premium, which bolstered the segment’s profits by $63 million while product premiums delivered approximately $7 million, Alcoa chief financial officer William Oplinger said.

About 55 percent of Alcoa’s expected 2014 shipments are exposed to the Midwest premium, 30 percent to European premiums and 10 percent to those in Japan, with the remaining 5 percent negotiated on an annual basis, Alcoa said. Premiums ended the first quarter at $409 per tonne (18.6 cents per pound) in the Midwest, $360 per tonne (16.3 cents per pound) in Europe and $371 per tonne (16.8 cents per pound) in Japan, the company said.

But despite those tailwinds, Alcoa saw its realized aluminum prices tumble to $2,205 per tonne in the first quarter, off 8 percent from $2,398 a year earlier. The dips came as London Metal Exchange tags for the light metal fell dramatically in the same comparison.

Oplinger said Alcoa expects an aluminum supply deficit of 730,000 tonnes in 2014. The alumina market is expected to be in surplus, although that forecast could change as a result of several factors, including Indonesia’s ban on bauxite exports (, Feb. 26), he said.

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