Alcoa Rises as Kleinfeld's Price Increase Limits Drop in Profit

By Dale Crofts

July 9 (Bloomberg) -- Alcoa Inc., the world's third-largest aluminum producer, gained in New York after higher prices for the metal helped the company limit a decline in second-quarter profit and top analysts' estimates.

Chief Executive Officer Klaus Kleinfeld, who took over in May, boosted aluminum prices in the quarter 6.2 percent to an average $3,058 a ton. The increase helped Alcoa post profit excluding certain items of 71 cents a share, topping the 65-cent average estimate of 17 analysts in a Bloomberg survey.

``This is a pretty solid quarter,'' Peter Klein, who helps oversee about $21 billion at Fifth Third Asset Management in Cleveland, said in an interview. ``They've certainly benefited from a rise in aluminum prices.''

Net income fell 24 percent to $546 million, or 66 cents a share, New York-based Alcoa said yesterday in a statement. Sales dropped 5.5 percent to $7.62 billion after the company sold its packaging unit.

Alcoa gained $1.05, or 3.2 percent, to $33.38 as of 7:26 p.m. in trading after the official close of the New York Stock Exchange. The shares had dropped 20 percent in the previous 12 months.

Alcoa was the first company in the Dow Jones Industrial Average to report results for the quarter through June. Earnings at companies in the index probably declined an average of 10 percent from the same period a year earlier, according to analyst estimates compiled by Bloomberg.

Emerging Markets

Increased consumption in emerging markets such as China and India is helping support prices for the lightweight metal used in beverage cans, automobiles and airplanes. Aluminum traded on the London Metal Exchange averaged 6.9 percent higher in the second quarter than a year earlier and reached a record $3,327 a metric ton on July 7.

The market this year will be ``essentially balanced'' because of supply disruptions in China and South Africa, Kleinfeld, 50, said today on a conference call with analysts. Global demand probably will grow about 7.6 percent this year, helping compensate for use that will decline about 5 percent in the U.S. and Europe, Alcoa said.

Operating income fell at three of the company's four units. Profit in the primary-metals business dropped 7.4 percent, and earnings in the alumina business slid 31 percent.

The company posted a charge of 5 cents a share in the second quarter because of reduced output in Texas and lost production at its alumina operations in Western Australia after an explosion curbed fuel supplies.

Australian Operations

The Australian alumina operations are running at full capacity again, and Chief Financial Officer Charles McLane said higher-cost replacement fuels will have a $45 million impact on net income in the third quarter. Reduced production at the Rockdale smelter in Texas will likely reduce profit by $22 million, he said on a call with analysts.

Alcoa slipped from its position as the world's largest aluminum producer after the merger that led to the creation of Russia's United Co. Rusal. Rio Tinto Group acquired Canadian aluminum producer Alcan Inc. for $38.1 billion last July, pushing Alcoa to third.

Alcoa teamed up with Aluminum Corp. of China, also known as Chinalco, to buy a 9 percent stake in Rio Tinto in February, and Alcoa now is seeking more joint ventures in China, the Middle East and North America. Kleinfeld said April 7 that he was holding talks with Chinalco about ``various options for the future.''

Alcoa expects to add as much as 50 cents to earnings per share in 2008 through new mining and metal investments, including the expansion of the Fjardaal smelter in Iceland, which will produce 300,000 tons of aluminum this year. The company is completing a 90,000-ton addition at the Pinjarra alumina refinery in Australia.

To contact the reporter on this story: Dale Crofts in Chicago at dcrofts@bloomberg.net.