By Julian Murdoch
Losing money is always bad, but in the case of commodities companies, it hasn't exactly been unexpected. Analysts expected Alcoa (NYSE: AA) to lose $0.56 per share. Instead, Alcoa reported a loss of $0.59, or $480 million, excluding one-time items. Given the state of the aluminum market, nobody should have been surprised.

Market Status
Demand for alumina – what aluminum is made from – as well as aluminum is in the dumps, along with everything else in the global economy. And of course, with demand, aluminum prices have crashed.

According to Alcoa's first-quarter report, LME Aluminum averaged $1,359 per tonne during the first quarter – down 25% from the fourth quarter of '08, and down 50% from 1Q08. LME Aluminum is now 57% off of the record price it hit in July 2008. Inventories are high as well, with over 3.5 million tonnes of the metal in LME warehouses as of yesterday. In response to falling demand and rock bottom prices, aluminum companies across the world have tried to quickly cut production, both to cut costs, but also to hopefully correct the demand/supply balance.

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Alcoa has cut 752,000 metric tons of production – or approximately 19% of its 2008 output. There are an additional 100,000 metric tons in production cuts planned on the books. Aluminum Corporation of China Limited, or Chalco (NYSE: ACH), has also made huge production cuts – 570,000 metric tons, or almost 25% of its 2008 production, according to the data in Alcoa's report. A somewhat conflicting but equally dire report by Sanford C Bernstein put the number closer to 45% idle capacity.

But Is It Far Enough?
Alas, it may be impossible for the aluminum industry to shrink itself to greatness this time around. A report from Platts on March 23 suggests even more slashing is needed. Macquarie Research piled on:

"Producers have made substantial production cuts, but those cuts have only scratched the surface of the surplus. In this environment, it is hard to see what is going to turn the aluminum market around in the near term. Short of the bankruptcy of one of the major producers, we still find it difficult to generate enough production cuts to prevent a huge surplus this year and a fairly large surplus in 2010 also."

Crystal Balls
It's no surprise that Alcoa (and the rest of the market) is expecting global aluminum demand for 2009 to be weak. During the earnings conference call, Chuck McLane, chief financial officer, said that there has been heavy de-stocking in Alcoa's supply chain, which was responsible for the weak demand. To put some real numbers on the table, Alcoa expects global demand for aluminum to drop 7%, or 34.5 million tons in 2009.

Seventy percent of aluminum consumption is split between packaging, transportation and construction. Packaging is historically fairly resilient during economic downturns, and Alcoa is expecting demand in the sector to be fairly stable globally, with China experiencing a 4% sales growth (yes, growth), and North America and Europe balancing that out with a combined 5% decline. Transportation and construction aren't so lucky globally, with both sectors forecast to see between 10% and 18% declines in end market sales. The only bright area is, as always, China, with an estimated 4% growth in automotive sales and 8-9% growth in construction for 2009.

In the short term, China is experiencing a local supply deficit, and there are reports that alumina prices are rising and aluminum smelters are beginning to restart.

"Strong aluminum prices are spurring some smelters to reopen idle and new capacity, boosting demand for alumina, smelter officials said. More than 700,000 tonnes, or 10 percent, of the country's idle aluminum capacity is in the process of restarting. Two tonnes of alumina are need for one tonne of aluminum production."

China is getting the aluminum it needs through increased scrap and primary metal importing as well as the restarting smelters. All those stocks sitting in LME warehouses will take a long time to trickle through the market to supply the Chinese - probably far longer than it takes China to flip the switch and get local supply on line.

While this could be a sign that China is recovering, with global demand down, no one is celebrating just yet. In fact, Alcoa's CEO Klaus Kleinfeld said during the earnings call that they expect China's aluminum industry to be self sustaining in the midterm – which means not a lot of demand for alumina or aluminum from elsewhere. According to these numbers, global demand rebounds next year, but even then, capacity is far and away enough to satisfy demand for years to come.

Other analysts, such as Andrew Keen with Bernstein in London, reported to Bloomberg "more production cutbacks will be coming as manufacturers use up their own stockpiles." Keen also is expecting aluminum for immediate delivery to average $2,500 per ton in 2010 – a nearly unbelievably rosy picture of an industry cutting its way back to profitability.

So while everyone agrees that it is bad right now, there is no real agreement as to when it will get better. In fact, after Alcoa's earnings report, analysts didn't even agree if the future was rosy or dark for Alcoa. Some analysts raised their estimates and some lowered them.

Investing Outside The Stock Box
Let's say you believe Keen's forecasts – and it wouldn't be crazy, he's considered a bit of a Svengali on copper – and are interested in investing in his 100% aluminum rally, but maybe you're skeptical about the whole "cut off an arm" theory of corporate development. You do have alternatives.

One option is the PowerShares DB Base Metals Fund ETF (NYSE Arca: DBB). As of yesterday, aluminum made up 23.87% of its holdings, giving you some substantial exposure, diversified with zinc and copper. (The fund starts off the year in November with each metal making up a third of the fund.) But there's really only one pure-play option: the iPath Dow Jones-AIG Aluminum Total Return Sub-Index ETN (NYSE Arca: JJU). It's a pure total-return aluminum futures ETN, but you need to be comfortable with the size: It's got less than $3.5 million in assets, and traded just a little thin yesterday, on a day the whole world was focused on aluminum: 2,540 shares. Still, a firestorm of activity compared with Monday's pre-call frenzy of 150 shares