Aluminum giant Alcoa Inc. (AA) and China Power Investment Corporation (CPI) entered into a deal to form a joint venture (JV) for producing high-end fabricated aluminum products for China. The terms of the agreement are yet to be disclosed.
The new company, named Alcoa CPI (China) Aluminum Investment Co. Ltd., will be based in Shanghai. Alcoa is expected to hold a major portion of the company’s share.
The agreement for the JV was signed by Alcoa’s Chairman and CEO and the President of CPI in Beijing. The joint venture was announced in September 2011 by the companies after they signed a Letter of Intent.
The joint venture will develop high-end engineered products that will be used in many industries including automotive, aerospace, packaging and consumer electronics. Both the companies believe that this deal will increase their competitiveness and will lead to profitable growth while facilitating them to serve their customers better.
In January 2012, Alcoa, the largest U.S. aluminum producer, reported loss in its fourth-quarter 2011 results. The company posted a loss from continuing operations of $193 million, or 18 cents per share compared with a profit of $172 million, or 15 cents per share in the comparable quarter last year.
Excluding restructuring charge of $159 million and other items, Alcoa’s loss came in at 3 cents per share, below the Zacks Consensus estimate profit of 1 cent. It is the company’s first loss in the last nine quarters.
For full-year 2011, Alcoa reported income from continuing operations of $614 million, or $0.55 per share, which is more than double of 2010 results. The disappointing results were driven by higher costs of energy and transportation.
Though revenues for the quarter rose 6% year over year to $6 billion, business was down in most areas including construction, industrial products, packaging and commercial transportation. Besides, sales to automobile manufacturers fell 2%. For 2011, revenue rose to $25 billion from $21 billion in fiscal year 2010.
For 2012, Alcoa expects global aluminum demand to grow 7% due to the worldwide deficit in primary aluminum supply. Alcoa’s growth projection is ahead of the 6.5% rate, which is required to meet its forecast of doubling the global aluminum demand between 2010 and 2020.
In addition, Alcoa believes that growing demand for aluminum, combined with market-related production cutbacks, will result in a global aluminum industry deficit of 600,000 metric tons in 2012
We believe that Alcoa’s cost reduction efforts are, to some extent, offsetting the negative impact of higher energy and raw material costs on profitability. The company is divesting underperforming assets through its restructuring program.
The annual global consumption of aluminum products, both upstream and downstream, is expected to double by 2020. This consumption boom will be driven primarily by growth in China, India, Russia and Brazil, whose demographics are accelerating development.
Alcoa retains a Zacks #3 Rank, which translates into a short-term (1 to 3 months) “Hold” rating and we have recommended the shares of the company as “Neutral” for the long-term (more than 6 months). Alcoa faces stiff competition from Aluminum Corporation Of China Limited (ACH), Rio Tinto plc. (RIO) and BHP Billiton Ltd. (BHP).
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