Damage Looks Contained to Alcoa

 | Jan 10, 2012 | 6:42 AM EST  | Comments
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Will someone actually sell something off of this Alcoa (AA) call?

All night last night I actually pondered this question, juxtaposed by the concept of what a horrid business aluminum has become simply because the Chinese are irrational. How irrational? The good people who run Alcoa actually have nailed it down. The Chinese are 5.7 tons irrational, meaning that's how much aluminum China shouldn't produce. That's all underwater capacity. The hope for Alcoa is that China shutters some of this capacity in 2012, maybe as much as 1.1 million tons of it. Otherwise it is hard to imagine how 2012 will be any different from the back half of 2011 when Europe really curtailed pricing power. The production cuts last week, lots of high-cost smelters in Europe, won't help demand, which is the issue. 

If you can find a similar situation where demand is weak in Europe and China is producing too much and not shuttering capacity that is underwater then you have a like situation to Alcoa and I guess you should sell. But the problem with that is that other than some types of steel, I can't really analogize or extrapolate here. And frankly, the reports about steel these days are much more positive than aluminum with China not exporting (dumping) as much as it was and domestic demand picking up. In fact, I would think that the steel companies actually may be able to beat the numbers, something that I think structurally Alcoa just can't do.

I do know this. You may not want to believe it, but Alcoa should be losing fortunes, not 3 cents a share. There's that much of a glut out there despite aluminum's fabulous qualities vs. other metals, including its lightness, which makes it very fuel efficient. The reason why Alcoa's not losing even more is that the company is taking aggressive action, shutting down expensive production and continuing to take costs out of operations.

In the end, it doesn't matter. As long as some region has a downturn, like Europe, and the Chinese need to keep people employed making high-cost aluminum Alcoa's a tough call.

But it's just Alcoa. And if you sell another stock off of Alcoa I think you've gone too far off the aluminum reservation to make sense to me.

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