January 7, 2010 / 7:51 PM / 8 years ago

PREVIEW-Alcoa profit seen, but aluminum outlook cloudy

NEW YORK, Jan 7 (Reuters) - Wall Street expects Alcoa Inc (AA.N) to post a small fourth-quarter profit, but optimism is tempered by concern over aluminum prices and how much the auto and aerospace industries rebounded from the recession.

A weak dollar and excess warehouse aluminum inventories, as well as tepid demand in some sectors, might limit the metal's rally, analysts said on Thursday.

Aluminum, used in automobile and plane manufacture, and for kitchen wrap and beverage cans, reached a peak of $3,380 per tonne in July 2008. But it slumped 35 percent later as the global economy went into recession and has only slowly risen. On Thursday the metal was selling in London at around $2,300.

Alcoa, which will report its fourth-quarter results on Monday, has cut production and trimmed its workforce in the past year as carmakers, aerospace companies and other customers pulled back. Analysts will be looking at Monday's numbers for signs the company will restart some operations as demand trickles back.

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For a graphic on Alcoa's earnings, click on:

link.reuters.com/qat32h

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Analyst Brian Yu, of Citigroup Global Markets, noted the company said it is taking a non-cash charge of $300 million to $500 million for curtailment of its smelters in Italy. He lowered Alcoa's investment rating to hold from buy, but maintained his $17 share price target.

"While aluminum prices averaged 9.5 percent higher in the fourth quarter from the third, we believe forex (foreign exchange) headwinds will likely prevent Alcoa from achieving Street earnings expectations," Yu wrote in a research note.

He said he expected earnings of 3 cents per share. Analysts on average are forecasting a profit of 6 cents and revenue of $4.82 billion, according to Thomson Reuters I/B/E/S.

Fraser Phillips, managing director of RBC Capital Markets' global mining research, said he expected only "modest" improvement over the third quarter's 4-cent profit, when Alcoa posted losses in the first and second quarters of last year.

"The outlook now depends on Alcoa's ability to continue to meet its cost-reduction targets on a timely basis, and the aluminum market outlook," he wrote.

"Aluminum continues to labor under the weight of significant excess inventory and capacity and we expect aluminum prices to continue to suffer as a result, limiting any upside potential for the (Alcoa) share price over the next 12 months," Phillips wrote in a research note.

Analysts have noted the price of the metal has been supported by financing deals which have tied up London Metal Exchange stocks. "The recent rally can only be maintained as long as the huge amount of metal tied up within these deals is kept off the market," Standard Chartered said in a note.

Analyst Charles Bradford, of Affiliated Research Group, said he expected Alcoa's results to be "disappointing," not because of any underlying problems, but because of very high tax rates.

Reporting by Steve James; Editing Bernard Orr

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