NEW YORK ( TheStreet) -- Alcoa ( AA) faces a dual profit threat of lower demand in Europe and declining aluminum prices. Alcoa CEO Klaus Kleinfeld has warned investors awaiting the company's thrid-quarter earnings report after the market close Tuesday that Europe has not seen the usual seasonal upswing from August to September in its flat-rolled segments. Bridget Freas, Morningstar's aluminum analyst, said that there is usually a pickup in September orders, but that hasn't yet materialized. Freas doesn't think volume will take a significant hit, however, and said that Alcoa's aerospace segment should be strong.
The average estimate of analysts polled by Thomson Reuters is 22 cents a share on revenue of $6.24 billion in the September period. That performance would be quite a step up from its profit of 6 cents a share on revenue of $5.3 billion in the same period a year earlier, but down heavily on a sequential basis when Alcoa reported second-quarter earnings of 32 cents a share on revenue of $6.6 billion. "Whatever it turns out to be, the third quarter is clearly going to be lower than the second quarter in 2011," Freas told TheStreet. Aluminum prices dropped about 15.2% from July through September to $2,124 per metric ton from $2,503.25 a metric ton. Shares of Alcoa correspondingly plummeted 40.2% in the same span as the European sovereign-debt crisis stoked uncertainty in global markets, weakening demand for the lightweight metal. Customers have grown weary of building inventory as prices have declined, which could negatively impact raw material producers and processors, Anthony Rizzuto, managing director of metals at Dahlman Rose & Co., wrote in a recent research note. "Since the end of the second quarter, cash LME London Metal Exchange aluminum prices have declined over 15%, as investor concern over the global macroeconomic environment has weighed on commodities," Rizzuto said. "While the decline has been greater than we anticipated, we believe that current prices have already reached the marginal cost of production." The LME is the only market in the world that trades aluminum. On June 24 Alcoa said it was awarded a multiyear contract to supply aluminum to aircraft manufacturer Airbus. Alcoa also supplies the aluminum used by Apple ( AAPL) for its laptops and iPad 2s. Lower aluminum prices, rising energy costs and high raw materials costs have all led analysts to lower their quarterly projections on Alcoa in recent weeks. "We'll have a repeat of the last quarter where the downstream is better and the upstream is questionable from commodity prices ," Lloyd O'Carroll, analyst at Davenport & Co., said. In a recent note to clients, O'Carroll reiterated a buy rating on Alcoa's stock on the premise that aluminum prices will be higher in 2012 and that profitability in the company's downstream business will go beyond its 2011 records. Given the expectations of a weak third quarter, the key driver of the stock may ultimately be the company's guidance for the fourth quarter. As conditions stand now, Freas isn't sure if the third quarter will be a temporary lull for Alcoa, or if it suggests something more long term. -- Written by Joe Deaux in New York. >To submit a news tip, send an email to: firstname.lastname@example.org