Alcoa sees aluminum demand staying soft in Q4

NEW YORK, Oct 24 (Reuters) - Alcoa Inc. (NYSE:AA - news) said, at an analyst's meeting on Tuesday, it expects many of the same business segments that weakened in the third quarter to remain soft in the fourth quarter.

Earlier this month, when the world's largest producer of aluminum reported third quarter earnings, it said it expected softness to continue in construction, transportation, building and distribution markets.

On Tuesday, Alcoa's Chief Financial Officer, Richard Kelson spelled out the details.

In Alcoa's alumina segment, he said some softening in demand can be expected as capacity increases when Billiton's Worsley plant in Australia expands to full production next year, and Kaiser restarts its Gramercy plant in the first quarter of 2001. Moreover, some smelters in the Northwest U.S. have shut down due to high power costs.

As for primary metals, Kelson said LME inventories are down, but many plants are idled due to high energy costs, and softness in downstream businesses is affecting upstream third party shipments.

Flat rolled products were up in the third quarter due to seasonally higher can sheet volumes, but the fourth quarter will bring the usual slowdown in can sheet.

And, demand for common alloy products should continue to be weak, specifically truck and trailer was and will be hit hard across the segment.

The CFO said, to look for more softness in the engineered products segment in the fourth quarter.

``Our truck, trailer, building, construction, distribution, and specifically extrusions, forgings, and fasteners remain soft. We would anticipate building and construction would have its normal seasonal weakness. Common alloy is flat. And truck and trailer and transportation in particular is very soft,'' he said.

``The good news in this segment for the future quarter, is that aerospace continues to improve and gas turbine remains a very strong market,'' he added.

For another bright spot, he said, ``we expect a normal seasonal fourth quarter uptick in our consumer packaging sector.''

The so-called other segment sector will show weaker demand in the residential building products market, and demand in the distribution market remains soft, but telecommunications will strengthen.

In other business, Kelson said Alcoa is on target for its $1.1 billion cost reduction initiative, acknowledging that higher energy costs have have compromised that goal.

The aluminum giant said recently that it sees no relief from higher energy prices, and was asked how it plans to deal with that issue.

President and Chief Executive Officer Alain Belda pointed out that before it acquired Cordant and Reynolds Metals, Alcoa generated 50 percent of its own energy, including hydro plants.

``We have a great deal of flexibility, lots of longer term contracts, and many of them specifically linked to hydro projects. We continue to monitor and watch that,'' he said.

``We also look at it from an economic point of view, that is, where you make more money selling power or producing power. We make those judgments as the opportunities show themselves,'' Belda said.

Answering a question about how Alcoa can continue to improve its financial measures, Belda said there are three main areas that drive their goal.

The first is to optimize assets and working capital.

Second, Belda said, are new technological developments being made in every area of the company.

``There are a lot of new technologies that are coming through for us at the moment. And I think you'll see a very large impact of the future of the company coming from the new technologies,'' he said.

Finally, to address the slowdown in economy, he said Alcoa plans to expand its programme of working with its customers to manage inventories and other processes more efficiently.

To meet its debt ratio target of 25 to 35 percent, CFO Kelson said, ``if we took proceeds from sale of Worsley alone after tax we'd be approaching that kind of number.''

He elaborated, saying Alcoa uses a multi-pronged approach.

``We will continue to use strong cash flow to bring that ratio squarely in line with that kind of number, with the caveat that we look always for opportunities for acquisition and growth if they meet our appropriate hurdle rate. And then there's the stock buyback programme we have not talked about.''

Kelson added, ``You'll see us bring the debt down to 35 percent range. And then depending on circumstances for opportunity for growth, we'll either continue to bring that down or grow or buyback stock.''