The European Commission (EC) is taking the Italian government to court for failing to recover € 295 ($417) million in illegal state aid provided to two Alcoa Inc. (AA) aluminum smelters five years ago.

In November 2009, the commission, which has antitrust powers within the European Union, found that Italy had given illegal state aid to Alcoa in the form of a preferential electricity tariff, which provided an unfair advantage to Alcoa over its competitors.

Italy was under an obligation to immediately and effectively implement the Commission decision. In particular, Italy was required to recover the full amount of aid granted to the smelter in Veneto since 2006, whereas recovery from the Sardinian smelter was limited to aid received from January 2006 until January 2007.

Although Alcoa lodged an appeal against the Commission’s 2009 decision and asked for interim measures, this does not dispense Italy from its obligation to recover the aid. In July 2010, the General Court dismissed Alcoa’s action for interim measures, but Alcoa still appealed.

In January, Alcoa posted better-than-expected year-over-year results for the fourth quarter of 2010 with net earnings and revenues exceeding the Zacks Consensus Estimate. The company continues to benefit from its cost saving efforts. We believe the cost cuts will make Alcoa more competitive when markets fully recover.

The annual global consumption of aluminum products, both upstream and downstream, is expected to double over the next 15 years. This consumption boom will be driven primarily by growth in China, India, Russia and Brazil, whose demographics are accelerating development. However, Alcoa is facing declining aluminum prices, higher input costs and significant restructuring charges, which could pressure margins in the near to medium-term.

Also, Alcoa faces stiff competition from Aluminum Corporation of China Limited (ACH), privately held Rio Tinto Alcan Inc. and RUSAL.

We currently maintain our Neutral recommendation on Alcoa. Currently, we have a Zacks #3 Rank (Hold) on the stock.

 
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