Alcoa’a profit plunge leaves Wall Street unsure where to jump
Posted on 10 January 2012 with 2 comments from readers
The 2012 earnings season got off to a miserable start with aluminium giant Alcoa posting a $191 million fourth quarter loss, the first sign that the eurozone crisis is beginning to impact on the profits of US multinationals.
Perhaps analysts should have seen this coming with Alcoa warning last week that it would reduce its global smelting capacity by 12 per cent to support profits as prices continue to decline.
Peak profits?
The peak profits theory exponded by Agora Financial’s top editor Chris Mayer among others in the middle of last year appears to be vindicated (click here). His argument in a nutshell was that record profit margins last year would always tend to revert to their long-term average.
Lower profits mean lower stock prices. There is little disputing that. Share prices are always a multiple of underlying profits, though that multiple does shift as optimism rises and falls in markets.
Investors who drove the Dow back to where it started in 2011 may now have second thoughts. The profits recovery of this business cycle may well be already over.
The bad news from Alcoa will mean production cuts in Spain and Italy, the two largest countries affected by the eurozone sovereign debt crisis, and Texas and Tennessee. That said Alcoa is still working on a seven per cent global increase in demand for aluminium this year, is that realistic?
Expect to see a more critical scrutiny of financial results from the major US companies this season. If last year does turn out to be one of peak profits then many Wall Street analysts are way too optimistic about 2012.
US revival?
The US economy is still struggling to shake off the downturn that started back in 2007 with the housing crash. Car sales annualized at 13.5 million are still three million down on pre-crisis years. Unemployment remains far too high for the huge sums spent to stimulate the economy.
At the same time the headwinds from Europe threaten to turn into a full-on hurricane. There is a false sense of security after the long New Year’s holiday season.
European leaders and bankers are now back at the negotiating tables and there are no easy options available to them. Those US analysts without a world view are about to get one.
2 Comments posted by readers:
I’m always amused by the parallels between aluminum companies and airlines. Both are poor investments. Airlines are too competitive since deregulation, and will forever be strangled with continually rising fuel cost. In about 15 years, as oil output begins to decline, air travel will be reserved for the wealthy. Like it was back in the 1930’s. Back then, it cost a fortune because of the maintenance needs of the piston engines. Next time, it will be the cost of kerosene. I wonder if Americans will travel cross – country by electric train, or hybrid electric cars. Trains are much faster and they can travel nearly around the clock.
Every country wants an aluminum industry for national pride, just like they want a steel industry and a car industry. Russia sits on trillions of tons of the stuff with free hydroelectric power from their gigantic Siberian river dams, and low labor cost. Good luck making a decent profit trying to compete with them. New Orleans once had a big smelter owned by Kaiser Aluminum. They closed it around 1970 due to high labor cost, and competition resulting from the availability of cheap hydro power we helped finance in foreign countries through the World Bank. We had to use natural gas which wasn’t as cheap as foreign government- owned dam power. The managers had to wait until Henry J. Kaiser died before they could start their outsourcing because he was a man who helped win WW II by defeating all those evil NAZIS. Moving jobs out of America might not sit well with him. Today communist killers are OK, as long as you can maximize your profit, for the shareholders of course. Free Tibet.
The demand for aluminum will increase, but all future production increases will be in countries with low labor and electricity costs. China is dumping 5,000,000 tons of aluminum on the world market at below the cost of production. That is how you bankrupt your competition if you are owned by the government, like nearly all large Chinese companies are.
Meanwhile, both Siemens and Phillips are saying business is slowing, and the Italian bonds are at 7.15%, yet stocks in Europe are zooming up 3%. Go figure.
Ed Note: Not sure I share your pessimism about air travel. Long-haul will increasingly be dominated by the Gulf airlines (cheap capital, new planes, labor and fuel). But I agree that the middle-class are going to be less wealthy in Western countries as the East rises – there simply is not enough for everyone to get richer at the same time. Then again I visited the USA 32 years ago as a student and everybody said America was finished then too… and today you are more dominant than ever really.
Lets not forget that all these low cost economies you talk about are where Alcoa have a lot of their business units.