Alcoa falls on production, job, expenditure cuts

Vancouver – Aluminum giant Alcoa (AA-N) is slashing production levels, jobs, and expenditures in an attempt to keep the company strong during these “extraordinary” times.

It’s the third time in as many months that the aluminum producer has cut jobs and production, though this move is the biggest. In short, the major is reducing smelting output by 750,000 million tonnes per year, eliminating 13,500 jobs as well as 1,700 contractor positions, freezing salaries and hiring, selling four non-core downstream businesses, and slashing capital expenditures in half.

“These are extraordinary times, requiring speed and decisiveness to address the current economic downturn, and flexibility and foresight to be prepared for future uncertainties in our markets,” said Alcoa’s president and CEO Klaus Kleinfeld in a statement. He said the moves are designed to ensure Alcoa maintains competitiveness in the current markets and can emerge with strength when the economy recovers.

Alcoa is the world’s third-largest producer of aluminum, behind Rio Tinto (RTP-N, RIO-L) and privately-owned Rusal. The major is struggling because the price of aluminum has fallen 50% over the last six months, from a peak of US$3,380 per tonne in early July to a current hover around US$1,500 per tonne. Demand is way down – aluminum inventories as monitored by the London Metals Exchange sit at 2.4 million tonnes, a 14-year high.

To deal with the price free-fall, Alcoa made its first production cuts in October when it curtailed its 265,000-tonne per year smelter in Rockdale, Texas. A month later the major cut another 350,000 tonnes of annual production.

Now Alcoa is slashing production rates again. By the end of the first quarter of 2009 Alcoa will have reduced its smelting output by a further 135,000 tonnes per year; combined with the reductions announced in October and November that means Alcoa has now cut output by 750,000 tonnes or 18% of annualized production. The company is also reducing alumina production by 1.5 million tonnes per year. Alumina is produced from bauxite and smelted into aluminum.

Alcoa’s planned job cuts will take longer to implement but by the end of 2009 the company will employ 13,500 fewer people, a 13% reduction in its workforce. The major is also letting go of 1,700 contractors and has frozen salaries and hiring.

The company is also planning to cut free four non-core downstream businesses: Electrical and Electronic Systems, Global Foil, Cast Auto Wheels, and Transportation Products Europe. The four businesses has combined revenues of US$1.8 billion in 2008 but carried an estimated after-tax operating loss of US$105 million. Alcoa expects to garner roughly $100 million from the divestures.

Alcoa is cutting its 2009 capital expenditures in half, to US$1.8 billion, compared to US$3.6 billion in 2008, and after partner contributions expenditures comes out US$1.5 billion. Half of that will go towards Alcoa’s key Brazilian growth projects; the San Luis refinery expansion and the greenfield Juruti bauxite mine are scheduled for completion in the first half of 2009.

News of the latest cuts came only a week before Alcoa’s fourth quarter financials are due out and the company warned investors that those statement will now include restructuring, impairment, and other special charges totalling US$900 to US$950 million after tax, or US$1.13 to US$1.19 per share. The restructuring and divestiture program is expected to save the company approximately US$450 annually, before taxes.

On another savings front, Alcoa’s efforts to find new, less expensive suppliers for raw materials have paid off. The company has altered its procurement arrangements for supplies such as energy, coke, caustic soda, and aluminium fluoride and says the changes will yield savings of more than 20%. Lower market oil and gas prices are also having a positive impact.

Alcoa has also finalized new agreements for clean, renewable energy in Quebec that extend through 2040. The company’s three aluminum smelters in the province – Baie Comeau, Becancour, and Deschembault – account for more than 25% of the company’s production. The agreements allow Alcoa to upgrade and expand production at Baie Comeau, which would bring combined annual production from the three smelters to 1.1 million tonnes.

On a related front, Alcoa and Norwegian-listed Orkla have agreed to exchange their stakes in a Norwegian smelting partnership and a Swedish extrusion joint venture in order to focus on their respective areas of expertise. Alcoa will take on Orkla’s 50% stake in Elkem Aluminum, making it the sole owner of the smelting company, and Orkla will receive Alcoa’s 45% holding in the SAPA extrusion profiles business. Elkem runs two aluminum smelters in Norway with combined output of 282,000 tonnes annually.

Alcoa is, of course, not the only aluminum producer suffering because of low demand and depressed prices. In mid-October Aluminum Corporation of China, that country’s largest producer of the metal, cut its output by 18%. And in December Rio Tinto said it would slow or halt investments.

News of its third, and largest, round of cuts pushed Alcoa’s share price down US$1.30 or 10.6% to US$10.89. Alcoa shares hit s 52-week high of US$44.76 in May before sinking to a year low of US$6.82 in November. The fall positioned Alcoa as the second-weakest performer in the Dow Jones Industrial Average. The company has 800 million shares outstanding.