Alcoa Counts On New Russian Deal (“Underperform” from our previous “Neutral” recommendation)

The U.S. aluminum giant Alcoa Inc. (AA: 11.72 0.00 0.00%) has signed a deal with Russia’s state-owned JSC United Shipbuilding Corporation to supply aluminum for consumption in its shipbuilding business.

JSC is the biggest holder of shipbuilding, ship repairing and engineering assets in the Russian shipping industry.

With this deal, Alcoa will be able to explore the Russian aluminum market.

Alcoa ventured into Russia in 1993. Later in 2005, the company purchased two aluminum fabricating facilities, Alcoa Samara Metallurgical plant and Alcoa Metallurg Rus. Since 2005, Alcoa has expended about $750 million in improving them. Alcoa’s Samara facility is Russia’s largest producer of fabricated aluminum. The facility accounts for about 40% in the mill products market while the Metallurg Rus. facility forms about 10% of the market.

Our View

In the long term, we believe this should be a good deal for Alcoa, which has been saddled with lower demand, declining aluminum prices and higher input costs. The deal should also help Alcoa generate demand in the developing aluminum markets of Russia.

However, the aluminum industry is generally highly cyclical, with prices subject to worldwide supply and demand forces among other influences. Alcoa is subject to cyclical fluctuations in London Metal Exchange prices, general economic conditions and aluminum end-use markets. The greatest risk for the company is a further deterioration in aluminum price. Any significant decline in aluminum prices in 2010 would likely make Alcoa underperform.

In our view, Alcoa’s near- to medium-term profitability is likely to come under pressure from rising energy and caustic soda costs. We also believe that the depreciation of the U.S. dollar is likely to translate into higher costs for Alcoa’s Australian, Canadian and European operations and restrain earnings. Additionally, higher restructuring charges are pressuring margins of the company.

Alcoa’s share price has declined consistently in the last couple of months after it reported first quarter 2010 results. We believe the company’s weak performance will continue in the rest of 2010. We downgrade the stock to “Underperform” from our previous “Neutral” recommendation.

• Peter Leeds Penny Stocks High quality penny stocks from The Penny Stock Professional.

• MQL4 programmers We will transform your strategy to an automated expert advisor

• Emerging Market North-East Brazil is one of the Fastest Emerging Markets.