Alcoa ceo Klaus Kleinfeld tells Metal Bulletin why economic sentiment is everything to aluminium prices, what investors should worry about the most, and the company's ongoing focus on free cash flow.
Perception is everything.
Just as sentiment towards the economic outlook was dragged lower last year as the threat of a US fiscal cliff loomed, Alcoa Inc is now finding the very idea that the aluminium producer could be downgraded to junk status an unfounded distraction in certain circles.
At the end of 2012, ratings agency Moody’s Investor Services put Alcoa on review for a possible downgrade, citing the “challenging headwinds” facing the firm – namely, weak aluminium prices.
“We do not see a material, sustainable improvement in aluminum prices over the next several quarters and expect Alcoa’s earnings performance and debt-protection metrics to remain challenged,” Moody’s said at the time.
Yet despite low aluminum prices, Alcoa generated full-year income and met all of its cash sustainability targets for the fourth consecutive year, ending 2012 in a strong cash position.
The review applied to all of Alcoa’s $8.3 billion of debt, which Alcoa has since cut to $7 billion.
However, according to Klaus Kleinfeld, Alcoa’s current balance sheet is stronger now than it was in 2008, while its net debt is its lowest since 2006, prior to the economic downturn.
“The overreaching 2013 financial target focus remains on positive free cash flow,” Kleinfeld said.
This will include taking actions to generate productivity gains of $750 million, managing growth capital of $550 million, controlling sustaining capital of $1 billion, targeting Saudi investment of $350 million and maintaining 30%-35% debt-to-capital, he added.
Alcoa had free cash flow of $535 million in the fourth quarter.
“We’ve been very strong in generating cash; it’s almost like déjà-vu. I remember the first quarter of last year, the big question was, ‘will you be using cash to fund your pensions?’ and my answer was repeatedly, ‘yes, it’s our intention,’” he told Metal Bulletin.
“Lots of people were sceptical but we did it in cash, even though London Metal Exchange prices declined, and we came out with more improvements elsewhere too,” he said.
So what will it take to get for the Moody’s review to vanish?
Higher aluminium prices – which are being influenced by perceptions.
“The LME aluminium price is very much trading on general economics and sentiment,” Kleinfeld said.
“If China comes back, if Europe continues to muddle through in this better-than-expected way, if the US debt ceiling issues are finally resolved, then we’ll absolutely see a rebound in prices,” he said.
“The markets gained confidence at the year-end when the fiscal cliff crisis was averted and rebounded, showing that it’s not the fundamentals that are driving prices, as they’re already pretty positive – it’s sentiment.”
But will that sentiment improve in 2013?
“I personally believe there are more arguments that sentiment will improve than against it,” Kleinfeld said.
He bases this view on recovery not just in Asia, but in Europe and the U.S.
Asia, driven by China is “clearly coming back” now the leadership transition has happened and the stimulus package is in place, he said.
Kleinfeld said that Europe’s strength was a “big surprise to me” with the region exhibiting an uncanny ability to “muddle through” its issues despite the markets talking it down.
But the ongoing debate over the US debt ceiling is similarly causing havoc with sentiment, he said.
“The big issue for 2013 is the debate on the US debt ceiling, which is potentially more damaging than the actual event,” he said.
“The debate has been going on for too long [...] it chews everyone’s confidence,” he added.
The executive said that investors should be more worried about the US debt ceiling than Alcoa’s cashflow.
“The US is not really a problem in general because the fundamentals are actually pretty good; automotive and aerospace have been growing, and building and construction is turning around. So what could stop that? One big thing, the destruction of confidence, of the infusion of fear,” he told Metal Bulletin.
“One day we’re talking about the fiscal cliff, and the phrase itself sounds very threatening, and the next moment we resolve things by replacing it with being afraid we’re hitting the ceiling. Both things are deadly, and in a way that’s the biggest risk here,” he said.
“[The debt ceiling] is really in the hands of the representatives and administration to resolve that and if we get it resolved, I’m optimistic we’re going to have nice growth - the fundamentals are there.”