U.S. aluminum giant Alcoa Inc. (AA) has plans to eliminate jobs at its Tennessee operations due to lower demand for aluminum can sheet. The company is cutting 90 jobs at its Blount County plant and 145 jobs at a sister operation in Indiana as it seeks to trim its work force to fit anticipated weak demand in 2010.
The reductions would take place during the first quarter at the company’s rigid packaging operations in Blount County and in Warrick, Indiana. The Blount County plant, which produces aluminum sheet for beverage cans, currently employs about 1,000 people.
The work force reduction comes one year after the company had announced that it would reduce its work force by 450 and halt production on the two pot lines at the South Plant smelting operations. The layoffs at Tennessee operations affect the can sheet operations in the Rigid Packaging Division, primarily the North plant. The company is working with union officials at the Blount County plant to offer voluntary severance packages as a first resort.
We are impressed by Alcoa’s ability to stay focused on its cost reduction target. Alcoa’s cost-cutting efforts have resulted in overhead cost savings of $375 million and raw material procurement savings of $1.61 billion in the first nine months of 2009. We believe that costs reduction efforts are, to some extent, offsetting the negative impact on profitability from higher energy and raw material costs.
Additionally, the company is making good progress in divesting underperforming assets through its restructuring program. For the current fiscal year, Alcoa has indicated that the company is likely to generate $320 million in cost savings by eliminating 22,200 positions globally.
Alcoa is among the world’s leading producers of primary and fabricated aluminum and alumina. The company posted modest profits in the most recent quarter helped by lower costs, after three consecutive quarterly losses. Alcoa continues to benefit from its cash sustainability initiatives. The company has exceeded expectations on each of its cash sustainability targets.
We believe the cost-cutting will make Alcoa more competitive when the markets recover fully. However, the depreciation of the U.S. dollar is likely to restrain earnings as it will translate into higher costs for Alcoa’s Australian, Canadian and European operations. We reaffirm our Neutral recommendation on Alcoa Inc.
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