Alcoa junk downgrade is rare trauma for Dow stocks

Shrinking Share

Alcoa, whose name was changed from Aluminum Company of America in 1999, joined the Dow in 1959. The company, which was the most valuable U.S. metal producer in 2002, has been overtaken in size and market clout by diversified commodities companies such as BHP Billiton Ltd. and Glencore Xstrata Plc. Its share of global aluminum production shrank to 9.1 percent in 2012 from almost 15 percent a decade earlier as production in China more than quadrupled to 19.7 million tons.

“China came on the scene 10 years ago and has really driven down global aluminum prices,” Jorge Beristain, a Greenwich, Connecticut-based mining analyst at Deutsche Bank AG, said in an interview yesterday. “In a more mature economy, commodities play less of an important role because you’re in more of a replacement cycle than a net fixed-asset investment cycle.”

Tumbling Prices

Alcoa has struggled to turn a profit as aluminum prices sag amid over-production. Aluminum for delivery in three months, the most active contract on the London Metal Exchange, rose 0.8% to $1,961.25 a metric ton at 9:26 a.m. New York time. It has dropped 5.4% this year and is down 41% from a peak in 2008.

The lightweight metal used in beverage cans, car parts and airplane wings was the third-worst performer in the UBS Bloomberg CMCI Index of 27 commodities in the past five years through yesterday, with a negative return of 45%.

Global production has exceeded demand for the past eight years, according to data compiled by Bloomberg. Worldwide output rose 2.8% to 45.2 million tons in 2012, according to the International Aluminium Institute.

Alcoa Chairman and Chief Executive Officer Klaus Kleinfeld has responded to falling prices by trimming production. Last year the company idled 13% of its smelting capacity and is now evaluating another 11% for curtailment or permanent halt by the end of next year.

The company is boosting sales at its engineered- and rolled-products divisions as Kleinfeld bets that record backlogs at aircraft makers and growing aluminum use by car producers will shift the sales mix to more-profitable products.

‘Down Cyclically’

“Alcoa is still a major industrial company,” Lloyd O’Carroll, an analyst at Richmond, Virginia-based Davenport & Co., said by telephone yesterday. “They are down cyclically, but that’s not necessarily for the long-term. Aluminum will not always be a negative.”

Moody’s lowered the long-term rating on Alcoa’s $8.6 billion of debt on May 29 by one step to Ba1 from Baa3, citing a decline in aluminum prices and a lack of “significant” recovery in the company’s profitability. The company is still rated above investment grade at S&P and Fitch Ratings.

While GM’s lead in the auto industry helped the company remain in the Dow despite a junk status until its bankruptcy in 2009, Alcoa’s membership may be more precarious because of the diminishing importance of aluminum to the U.S. economy. GM also was removed from the S&P 500 in 2009 and will return after the close of trading on June 6, S&P Dow Jones announced this week.

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