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Alcoa Takes $166 Million Hit, Closing More Plants

July 10, 1987

PITTSBURGH (AP) _ Aluminum Co. of America said Friday its second quarter results would be lowered by $165.7 million, with most of the writedown coming from further plant closings.

The nation’s largest aluminum producer and its leading competitors took a round of writeoffs for plant shutdowns in late 1985, when Alcoa took a $175 million charge in cutting its smelting capacity by nearly one-fourth.

The latest production cuts reflect a continuing effort throughout the domestic aluminum industry to eliminate older, less efficient equipment and thereby reduce production costs.

The cuts continue even though aluminum ingot prices have climbed from around 50 cents per pound in late 1985 to around 73 cents today, and they could position the producers for healthy profits in the third and fourth quarters, said industry analyst Ron Schorr of Bear Stearns & Co.

″That’s why these kinds of announcements are so fabulous for the business,″ he said. ″Despite this huge advance in prices, the companies are still thinking in the mode of shutting down facilities.″

Alcoa said that improving conditions in the world aluminum industry during the second quarter would produce a significant improvement in operating income in the second quarter.

The company reported 1986 profits of $254.1 million, including $198.2 million from the sale of real estate, on sales of $4.7 billion. It reported first quarter 1987 net income of $49.5 million on sales of $1.3 billion. Second quarter results are due July 17.

Aluminum prices have risen largely because producer inventories were drawn down to near record lows, Shorr said.

″Demand has been quite good,″ said William Siedenburg, an industry analyst for Smith Barney, Harris Upham & Co.

Some industry analysts had predicted conditions in the world aluminum market could be poor over the long term because of growing capacity in other countries.

Shorr, however, said European producers could be forced to shut down facilities in part because the devalued U.S. dollar makes their products more expensive by comparision. Barring an economic recession, he forecast good business conditions for the domestic industry in 1988.

Pittsburgh-based Alcoa said it would take a $23.9 million charge for the cost of refinancing $300 million in bonds. The company expects to save $15 million per year in interest charges.

Poor business conditions in the commercial shipping industry account for $16.9 million of the second quarter charge. Alcoa Steamship Co. hauls the company’s material as well as taking commercial loads.

The biggest charge, $124.9 million, covers equipment shutdowns.

Alcoa said it will close ore refining capacity that is no longer competitive and facilities that fabricate ingots into other products, such as sheet, foil and extrusions.

Alcoa spokesman Al Posti said managers are in the final stages of deciding which plants to close, and except for one smelting potline in Suriname, the leading prospects were not identified by the company.

Siebenburg said one prospect might be Alcoa’s big plant at Alcoa, Tenn.

″They probably won’t shut down the whole thing,″ he said. ″To the extent that they produce their own electric power they’ll keep the operation going, but to the extent that they have to buy power, which is very expensive, they might shut down.″

Aluminum production consumes large amounts of electricty.

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