There are two ways to look at the Alcoa (AA) quarter that started off the earnings season last night. You can focus on the price of aluminum -- a three-week low -- and how much oversupply China might be pumping out. Or you can focus on Alcoa's read on the world's economy.
The first, the Chinese focus, is, if you ask me, a tale of sound and fury that signifies nothing. Nevertheless, it was the dominant theme among the analysts on the conference call. What a shame. The Chinese aren't even much of a factor in the worldwide aluminum market; they just get talked about as if they are, because they are a rogue manufacturer, even among themselves. In other words, they seem to dump aluminum everywhere. But even though they do, Alcoa still managed to grow revenues by 7% and it should be even stronger in 2015. Much of that growth came from organic products in auto and aerospace, a terrific number that again was overlooked amid all of the hubbub about China.
That's why I like to focus on the economy when it comes to Alcoa, because it plays in pretty much every aspect of the world's economies.
And here's what you need to know: the economy's growing and getting stronger as the year has progressed, according to CEO Klaus Kleinfeld who, last night, raised his growth rates for a host of important industries. Kleinfeld is predicting a 6.5% growth in demand for aluminum, on top of the 9% growth it had last year. Remember aluminum is supposed to be a tired old commodity.
Where's this growth coming from?
The first, and perhaps most important economic delta, given how Kleinfeld has positioned the company, is aerospace, where market growth is accelerating to the 9% to 10% level. That's an astoundingly strong figure.
Every time you think of selling Boeing (BA) remember that number. Kleinfeld sees nine years of production growth ahead and orders for 23,700 engines -- their materials are a huge part of an engine.
We may be worried about the airline stocks, but I am not so sure we should be worried about the airlines, with the 7% passenger growth he's foreseeing. Regional jets are growing at 10.8% -- that's 50% above three years ago in units. What a comeback.
Autos? He still sees more production growth worldwide, even after last year's robust numbers. Alcoa believes U.S. units will see growth from 16.4 million to 17.1 million, with trucks doing fabulously -- something that's incredibly significant for Alcoa given its new-found placement in the Ford (F) F-150.
We are supposed to be fretting about every bit of consumption in China, but it will have 6.2% auto production growth, according to Alcoa. U.S. will be up another 5.6% and, at last, Europe is strengthening, with exports up 3.6%. There's the weak euro at work. Europe had been a big drag in the auto category, but it is a drag no more.
Next up? Heavy duty trucks. These huge industrial vehicles look to be mixed in production, because China's numbers are plummeting, down a pretty frightening 31.2% year to date as of February. No wonder Goldman Sachs pulled its buy on Cummins (CMI) yesterday -- although forecasters were wise to this drop-off, as there had been a pull ahead in last year's fourth quarter because of regulatory changes.
Global truck production is expected to be minus two to minus four over last year, even though the U.S. order book is the highest since 2006 and production for the first two months of the year is up 16%. Europe's getting a more robust heavy duty truck market. Alcoa had projected that there could be a 10% decline, but it looks like it is only going to be minus 5% to 7%. The trajectory is right.
Building and construction worldwide is starting to get very strong, with Alcoa projecting 5% to 7% global sales made up of 4%-5% North America, 7% to 9% China and minus 2%-3% Europe -- still a nice improvement year over year.
There's still plenty of weakness in packaging, and it looks like there's another fall off in carbonated soft drinks at minus 2% to 3%, not made up by the plus 1% to 2% beer increase. China saves the category though, with 8% to 12% growth, mostly displacement of other materials with aluminum. Fortunately, it's not that big a category.
Finally, industrial gas turbines, huge users of aluminum, are going to grow 1% to 3% according to the company, much better than last year given that orders were down 16%.
So we put it all together, and other than heavy duty trucks, because of China, all major industrial areas are growing, and growing faster than they were going into the year. That's not what the aggregate data bear out, not at all. We keep hearing, for example, about 1% Gross Domestic Product growth for our first quarter.
Now, we are a nation driven by retail and consumer spending. Alcoa's numbers aren't that representative of that figure. But when it comes to industrial and manufacturing? It's the real deal forecaster, and the forecast is pretty darned rosy, despite all of the gloom that still shrouds us every time we look at the economic landscape.