Aluminum Bellwether Only: Alcoa's Results

By MARK GONGLOFF Investors tempted to draw broad conclusions about commodity demand from Alcoa's earnings report should resist. The aluminum maker reports second-quarter results Wednesday afternoon, marking the unofficial kickoff of earnings season. Wall Street analysts, on average, estimate that Alcoa lost 38 cents a share in the quarter, compared with earnings of 66 cents a year ago. It would mark Alcoa's third consecutive quarterly loss, due largely to falling aluminum prices, which dropped along with the global economy from roughly $1.50 a pound last summer to less than 60 cents in February. During that time, Alcoa's share price sank from about $35 to less than $6. Hopes for an economic rebound have pushed aluminum prices up 24% in the past few months, while Alcoa shares have rallied roughly 80%. Still, much of the recent demand for aluminum and other metals has been due to China restocking industrial supplies in the first half of the year. That process may be winding down, and commodities might soon need longer-lasting sources of demand to keep climbing higher. Even then, aluminum's long-term prospects are among the rockiest of all commodities. UBS analysts recently raised their price forecasts for a wide range of metals, from lead to gold. The only metal for which UBS cut its estimates for both 2010 and 2011 was aluminum. The big problem for aluminum is that there is far too much of it. Rising inventories have been a problem for most commodities, but especially for aluminum, which has more global production capacity than most any other metal. That production hasn't been cut nearly enough to match declining demand. Deutsche Bank analysts expect production of 36.7 million metric tons this year, compared with demand of about 35 million tons. Demand and supply are more closely in balance for copper, zinc and other metals. Total aluminum inventories were up 165% from a year ago in May to 17 weeks' worth of demand, according to Bank of America Securities-Merrill Lynch analysts, compared with a long-term average of 7.5 weeks. The world will need to make a lot of cars and beer cans to close that gap. Until then, aluminum might lag behind other commodities.