China slowdown crimps Alcoa demand

The company now estimates demand will grow by 6% in 2012, down from its earlier forecast of 7%.

By Jim J. Jubak Oct 10, 2012 5:08PM
It's not the dimension; it's the direction that has the financial markets worried Wednesday after Alcoa (AA) reported third-quarter earnings of 3 cents a share, excluding non-recurring items.

That was better than the consensus estimate of a flat quarter. At $5.83 billion, revenue was down 9.1% from the third quarter of 2011 but above the consensus estimate of $5.57 billion.

The problem, though, is that those better-than-consensus numbers came with a lower company forecast on global aluminum demand for 2012. 
Alcoa now estimates that global demand will grow by 6% in 2012. That’s down from the company’s earlier forecast of 7% growth for the year. Demand growth of 6% would be the lowest rate since the recession of 2008-2009. Demand grew by 13% in 2010 and 10% in 2011. (The company also said that it still expects that global aluminum demand will double from 2010 to 2020.)

The reason for the lower forecast? China, of course. Slower economic growth in China means slower growth in demand for aluminum.

Image: China (Lawrence Manning/Corbis)
When does that slower growth in China stop and when does China’s growth rate start to accelerate again? Alcoa CEO Klaus Kleinfeld told analysts and investors on the company’s conference call that he was "pretty confident" that stimulus measures by the Beijing government would result in an acceleration in demand, but that it was probably going to take until the end of the fourth quarter before the company and the Chinese economy in general saw the results.

You can see why this earnings report might make investors uneasy. On the one hand, Alcoa has reported a pattern of steady falling growth in global aluminum demand from 13% in 2010 to 10% in 2011 to a forecast 6% in 2012.

On the other hand, all that investors have is a CEO’s confidence that China’s stimulus measures will work and that investors should be able to see the results at the end of the fourth quarter.

It doesn’t help that already Wednesday other companies have echoed Alcoa’s forecast for slower growth. For example, diesel engine maker Cummins (CMI) lowered its full-year revenue guidance for 2012 to $17 billion from a previous $18 billion. Earnings before interest and taxes are expected to be 13.5% for the year, down from prior guidance of 14.25% to 14.5%.

Cummins reports earnings on Oct. 30.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did not own shares of any stock mentioned in this post as of the end of June. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 



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