By Kirk Maltais
New York 11/10/2016 - Alcoa Inc reported a profitable third quarter for its downstream business, but lower demand for airframes related to model transitions by original equipment manufacturers (OEMs) continues to weigh on the company’s bottom line.
“There’s a lot going on with the aero structures side and the aero engines side,” Alcoa chairman and chief executive officer Klaus Kleinfeld said during an October 11 earnings call. “The market has been more dynamic [than expected].”
Inventory destocking and build-rate reductions by Chicago-based Boeing Co and Toulouse, France-based Airbus SAS—on models such as Boeing’s 777 and 747-8 and Airbus’ A380—are a headwind for Alcoa’s Global Rolled Products and Engineered Products and Solutions segments, he said.
“We do see 2016 as a transition year,” Kleinfeld said, noting that the company’s aerospace segment is expected to be flat through the rest of the year. “The [airframe] overbuy that we saw in expectation of a ramp-up of the new platforms has led to an oversupply on the airframe components side. We’re going through a phase of destocking.”
Overall, Alcoa continues to see a softening of growth in wide-body aircraft, along with "solid growth" for narrow-body aircraft. Meanwhile, the ramp-up of new jet engine launches has proved a challenge, although Kleinfeld characterised the launches as temporary “teething” issues related to the long supply chain that engines go through before being installed.
“The fundamentals are very strong; we just have to get through these launch issues that exist,” Kleinfeld said, adding that “the only way you can get hold of these issues is to get your arms around the whole supply chain.”
Challenges in aerospace have been a theme for Alcoa’s downstream business, which is set to begin operating separately as Arconic Inc on November 1.
However, automotive remained a bright spot as the company logged record shipments for the three months ended on September 30. Auto sheet shipments were up 49% from the same period last year, and shipments are expected to be up 45-50% year-on-year in the fourth quarter.
Automotive production is expected grow 1-4% globally for the year, but Kleinfeld characterised automotive performance as “a tale of two cities.” While light-duty autos continue to enjoy record sales, spurring healthy production by OEMs, the heavy-duty truck and trailer segment is expected to contract 28–30% year-on-year in North America this year.
“Unfortunately, it’s not a good picture. We’ve continued to see it get worse,” Kleinfeld said, attributing the slide in heavy trucks to weak orders and high inventories.
Despite the downstream headwinds, Alcoa's third-quarter net income nearly quadrupled to $166 million compared with the same period last year despite a 6.5% drop in sales to $5.21 billion.
This article also appears in American Metal Market as part of its daily nonferrous news coverage (www.amm.com). AMM and FastMarkets are part of the Metal Bulletin Group, a global Price Reporting Agency.