Alcoa results indicate better times ahead

The firm has gained more from its value-add businesses such as auto and aerospace than from selling aluminium as a commodity

Alcoa is to US markets what Infosys is to Indian markets. That's because both of them signal the start of the earnings season. But that is where the similarity also ends.

Alcoa, the largest producer of aluminium in the world, signals the health of various sectors globally. Apart from the progress of aluminium, the results indicate the health of other industries such as aerospace, automotive and energy.

This time around, Alcoa's results send an important message to the aluminium industry. For the first time in nine years, aluminium demand is expected to overshoot supply. The industry was saddled with high inventory piled up by the Chinese, and this resulted in aluminium prices remaining subdued for nearly a decade. The metal touched a new four-year low in February 2014.

Alcoa in its post-result call, said that there will be a global supply deficit of 730,000 tonnes as compared to a surplus of 106,000 tonnes it had predicted at the end of December 2013 quarter. The company expects worldwide demand to grow by seven per cent this year.

In its March 2014 ending quarter, Alcoa posted better-than-expected profit numbers but failed to meet the revenue expectation on account of lower aluminium prices, which had fallen by eight per cent as compared to the same quarter previous year.

Alcoa's results highlight that it has made more money from its value-add businesses than from the commodity business of selling aluminium. The company is contemplating cutting its smelting capacity and concentrating more on the automobile and aerospace sectors.

Alcoa expects aerospace business to grow by nine per cent during the year, especially on account of the success of Boeing's Dreamliner. But what is more interesting, especially for Indian companies such as Hindalco, is Alcoa's statement on the automotive industry. Alcoa's management said that they would be increasing sales of auto sheet by nearly four-fold in the next four years. Hindalco's subsidiary Novelis is also a major player in the auto sheet industry.

The reason for the sharp jump in auto sheets is on account of 'light-weighting'. An increasing number of automobile manufacturers are stepping up their efforts to reduce the weight of the cars and truck they make, without compromising on safety. Not only does this reduce manufacturing cost, but is also beneficial in improving fuel consumption. Alcoa's management in the analyst call said, "Opportunity in auto is tremendous, this is just the start of the light-weighting story."

Alcoa's results and guidance indicates better times ahead for the aluminium sector as well as aluminium as a commodity. But the better story is in the changing structural dynamics in the automobile industry.