Alcoa warns as much as 20% of aluminum capacity is unprofitable

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Alcoa Corp. warned that surging costs around the globe have rendered as much as 20% of aluminum-production capacity unprofitable.

Despite rising worldwide aluminum demand, Alcoa will be pinched by escalating costs for energy and raw materials, Chief Executive Roy Harvey said during a call with analysts on Thursday.

“Based on June’s average prices, we estimate that between 10% to 20% of worldwide smelting capacity was underwater last month,” Harvey said. Given recent spot-price action, about half of China’s smelting capacity probably is losing money, he added.

Aluminum makers are contending with surging electricity costs in Europe and North America, growing fears of a demand-killing recession, and rolling Covid-19 lockdowns in China, the world’s biggest producer of the metal. International efforts to isolate Russia in retaliation for its invasion of Ukraine have compounded the uncertainty about global aluminum supplies.

Century Aluminum Co. announced last month that it would shutter the second-largest mill in America because its electricity tab tripled in a matter of months.

Despite the headwinds, Alcoa announced an additional $500 million in share repurchases after posting better-than-expected quarterly results on Wednesday.

The company posted $913 million in adjusted earnings before interest, taxes, depreciation and amortization in the second quarter, beating the $908.7 million average estimate of nine analysts compiled by Bloomberg. Aluminum shipments will be between 2.5 million and 2.6 million metric tons, Alcoa said, unchanged from its prior forecast.

Although so-called adjusted earnings surpassed analysts’ expectations, Alcoa said the figure was lower on a sequential basis as aluminum prices dropped and costs rose.

“On the demand side, while there is some global uncertainty in the near term, demand continues to grow,” Harvey said.

Alcoa said earlier this month that it would curtail one of three smelting lines at an Indiana facility due to a shortage of workers. The producer said Wednesday it anticipates a negative impact of $20 million to third-quarter net income from the curtailment.

“Smelter capacity closures should support the price, although we do not expect a strong recovery in prices until 2023 at the soonest,” analysts at Jefferies wrote in a July 20 note to investors. “These capital returns help, but the macro matters much more for now.”

Alcoa shares dropped 1.2% at 11:05 a.m. in New York, after opening the trading session up more than 5%.

(By Joe Deaux)

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