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Alcoa Inc (AA) a Bellwether … for China?

The official unofficial beginning of earnings season has long been considered the report from Alcoa Inc (NYSE:AA), with the news setting the early tone for the broader market. As the company’s market capitalization has fallen, and with it its influence, many have begun to wonder if the aluminum maker’s earnings release is still a meaningful event in the larger context. With commodities having skidded for the first half of the year already, this perception is as prevalent as ever.

Alcoa Inc (NYSE:AA)While the importance of Alcoa Inc (NYSE:AA)’s numbers may have been called into question for setting the outlook for the U.S. — although there is an argument that the aluminum market is a solid indicator for the automotive sector — the impact of the results as a leading indicator for China may be on the rise. The country represents the largest driver of growth for Alcoa across a number of critical sectors. With the Chinese consumer price index rising more than expected, some have speculated that government stimulus may contract — strong growth projections from the company suggest that the Chinese economy is on solid footing.

The numbers
Excluding one-time events, Alcoa Inc (NYSE:AA) reported earnings of $0.07 per share, beating expectations of $0.06 per share. Revenues also narrowly beat consensus estimates of $5.83 billion, coming in at $5.85 billion. Perhaps most notable was the company’s forecasts on demand for the rest of the year. While automotive demand is expected to rise between 1% and 4%, U.S. demand was raised slightly higher at 2% to 5%. Aerospace demand is expected to rise 9% to 10% and construction demand by 4% to 5%. Overall, Alcoa sees an uptick in global demand of 7%, which should have some offsetting effect on the continued weak prices in the sector.

To put these numbers in perspective relative to China, CEO Klaus Kleinfeld explained during the earnings call that demand in China is a critical element across sectors. Forecast demand growth for the automotive sector is 7% to 10%, while it’s 12% to 16% for the aerospace segment, and between 8% and 10% for commercial building and construction. The company also pointed out that Chinese aluminum stocks are down 99,000 metric tons since the end of the first quarter and that consumption has driven non-strategic reserves down by 399,000 metric tons. With demand numbers remaining high, the outlook for China seems to remain in place. It’s important to remember that a significant portion of infrastructure spending in China is government-backed.

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