By JOHN W. MILLER
Updated Jan. 11, 2016 7:31 a.m. ET
Alcoa Inc. has struck a $1.5 billion long-term supply contract with General Electric Inc.’s aviation unit, underscoring the aluminum producer’s efforts to offset difficult conditions in its raw-aluminum business.
Under the deal, New York-based Alcoa will supply advanced nickel-based superalloy, titanium and aluminum components for engines and for engine parts made by GE.
Alcoa shares rose 1% in recent premarket trading.
The announcement comes ahead of what is expected to be Alcoa’s worst quarterly report since early 2014, due after the market closes Monday, including a 17% drop in revenue from a year earlier and earnings of two cents a share, according to a poll of analysts. Raw-aluminum prices have fallen over 25% to about $1,500 per ton in the past year. Details of the GE deal were in a news release viewed by The Wall Street Journal. As usual, it will be first major U.S. company to report, setting the tone during a volatile time for the stock market.
A spokesman for GE said that Alcoa was “an important player” in a “historically high-production phase,” during which GE and partner companies have “a backlog of more than 15,000 commercial engines to deliver over the next several years.”
Alcoa will make the parts in six U.S. states, as well as in France and Canada. Alcoa said its aerospace division secured “approximately $9 billion” in contracts during 2015. It has also signed billion-dollar-plus deals to supply Boeing Co. and Airbus Group SE.
Alcoa already had signaled plans to spin off its lucrative parts business during the second half of 2016. The spinoff, which has yet to be named, will also supply aluminum sheet to auto makers, including to Ford Motor Co. for its F-150 pickup truck.
As it trumpets parts-making deals, Alcoa continues to close smelter production in high-cost areas like the U.S., Europe and Australia. Since 2007, it has closed or sold 48% of its raw-aluminum capacity.
Last Thursday, the company said it would permanently close one of the U.S.’s biggest aluminum smelters, Warrick Operations in Evansville, Ind., and curtail production at an alumina plant in Texas, eliminating 1,270 jobs. Roy Harvey, president of Alcoa’s raw-aluminum division, said the assets being closed were “not competitive.”
Despite U.S. car and plane makers buying more aluminum than ever, the industry appears to be no longer viable in the U.S. The number of operational raw aluminum smelters has declined to less than 10 from around 22 fifteen years ago.
Power, a key component in making aluminum, is too expensive in the U.S. relative to other countries, and shipping costs and import tariffs are so low that companies make more profit importing raw aluminum and doing the processing and cutting in the U.S.
Alcoa’s strategy is to focus on making raw aluminum in places where power is cheaper, such as Iceland and Saudi Arabia
Tom Conway, vice president for the United Steelworkers union, which represents many Alcoa employees, said the situation was hurting American workers. “It sucks,” he said.
The company said the closures would result in charges of $170 million to $180 million, spread over two quarters.
Original article can be found here: http://www.wsj.com