China recovery breathes life into Alcoa

Three months has turned out to be a long time in commodity markets.

Overnight Alcoa released a fourth-quarter earnings announcement that saw it solidly back in the black after what had otherwise been a difficult year. After losing $US143 million in the third quarter it posted a $US242 million profit from continuing operations in the fourth.

Perhaps of greater interest, however, was a significant shift in tone from the gloom that pervaded its third quarter presentation, where it was downgrading expectations for growth in demand for its products China, particularly in the construction sector and in demand for heavy trucks and trailers.

That was reflective of a more general concern about the policy-induced slowing of China's economy as it tried to take the heat out of its property markets and coincided with the steep falls in commodity prices, particularly iron ore. The iron ore price fell below $US88 a tonne in September.

Alcoa's latest assessment of market conditions remains relatively pessimistic about the outlook for its end markets in Europe and the US this year but has wound back up its projections for growth in demand in China. Overnight, of course, the iron ore spot price continued its recent surge to hit $US158.50 a tonne.

In its third quarter presentation to analysts Alcoa saw growth of 4 per cent to 7 per cent in China's automotive production for 2012, an 18 to 21 per cent fall in heavy truck and trailer production and mid-single-digit growth in commercial building and construction sales and beverage can packaging.

For 2013 it is now forecasting 7 per cent to 10 per cent growth in automotive, 12 per cent to 19 per cent growth in heavy trucks and trailers, 8 per cent to 12 per cent growth in beverage can packaging and 8 per cent to 10 per cent growth in commercial building and construction.

Whatever the actual outcomes, that shift to a more optimistic outlook is consistent with the general view that China's cautious efforts to re-stimulate its economy and its new infrastructure-focused spending are starting to have a positive effect.

The iron ore price rebound may be exaggerated by some seasonal influences and re-stocking but more broadly there is a belief that China's sliding growth rate bottomed towards the latter stages of last year and is back on track for solid growth this year, albeit not at the double-digit rates the world had become accustomed to.

In its own alumina and aluminium markets, Alcoa sees supply and demand broadly in balance, even though it believes growth in global demand for primary aluminium could accelerate from 6 per cent in 2012 to 7 per cent this year.

Because of the interruption to prospective new supply created by the implosion in the iron ore price and coal prices last year there may also be a better balance of supply and demand in other commodities this year to provide a more positive and stable framework for commodity producers.

While the eurozone remains in a fragile and recessed condition and the US continues to grapple with a weak economy and the politics of its debt and deficits it is improbable that the global economy can produce anything other than modest growth at best.

For commodity producers like Australia, however, China is the main game and Alcoa's relative optimism is encouraging.

The abruptness of its change of outlook from relative pessimism to mild optimism in the space of just three months, however, underscores just how volatile and unpredictable economic conditions and demand for commodities are in the post-crisis period. That appears likely to remain the case for quite some time.