Alcoa Inc (AA.N), facing a sharp drop in aluminum prices, is losing favor on Wall Street as analysts lower their expectations for the company's earnings.

Alcoa, the largest U.S. aluminum producer, is expected to turn a second-quarter profit after a year-ago loss, but analysts have recently been cutting their forecasts, and one sees the possibility of a return to red ink later this year.

Over the past three months, the price of aluminum has dropped sharply, from over $2,400 per tonne in April to around $2,000 on Friday.

The price of the metal had been climbing steadily since the depths of the 2008 recession, but weak demand for cars, planes and construction and uncertainty over the strength of the global recovery have knocked it back.

The metal price was essentially flat in the second quarter from the first, but already in the third quarter it's down, and that's where Alcoa's earnings are, said Charles Bradford, an analyst with Affiliated Research Group.

He lowered his second-quarter estimate this week to 12 cents per share from 19 cents as a result of the aluminum's price drop. The biggest thing might be the third quarter -- there could be a loss.

Alcoa's results, often viewed as a bellwether of the U.S. economy, will kick off the U.S. earnings season when they are released after the close of stock-market trading on Monday.

Analysts currently expect Alcoa to report second-quarter earnings of 12 cents a share, according to Thomson Reuters I/B/E/S. But StarMine SmartEstimates, which puts more weight on recent forecasts of top-rated analysts, point to a profit that could fall short of the consensus estimate by 2.7 percent.

In the first quarter, Alcoa reported a profit of 10 cents a share, excluding one-time items -- an improvement from the second quarter of 2009, when it posted a loss of 26 cents a share.

Anthony Rizzuto, managing director of Dahlman Rose & Co, cut his second-quarter estimate to 10 cents from 15 cents this week because of lower-than-expected aluminum prices.

We remain optimistic over the medium to long term that aluminum prices will trend higher, but over the near term, economic uncertainty may present a headwind, he said.

Rizzuto said demand in the aerospace sector was set to improve, along with commercial vehicles and automobiles, but nonresidential construction may continue weak.

Aluminum demand may face some near-term challenges, but we anticipate that increasing power prices, improving consumption -- driven largely by emerging markets -- and industry discipline should be supportive of the price over the medium to long term.

While noting that Alcoa had been investing in low-cost production, he said, we remain concerned that the sluggish economic recovery will cap the upside in aluminum prices over the near term.

Tony Robson of BMO Capital Markets lowered his second-quarter estimate this week to 10 cents a share from 19 cents. He said that based on Alcoa's own estimate that annual net income goes up or down by $200 million with each $100-per-tonne fluctuation in the aluminum price, the $12-per-tonne decrease in the average price in the second quarter could result in a $6 million decrease in Alcoa's quarterly earnings.

RBC Capital Markets' Fraser Phillips said refinancing and cost reductions in 2009 reduced the pressure on Alcoa's balance sheet and the company's shares responded positively.

But he said the outlook depends on Alcoa's ability to continue to meet its cost-reduction targets, as well as the aluminum market outlook.

Aluminum continues to labor under the weight of significant excess inventory and capacity, and we expect aluminum prices to continue to suffer as a result, limiting any upside potential for the share price over the next 12 months, Phillips wrote in a research note.

Alcoa shares were trading at $10.82 around midday Friday, up from around $9 a year ago but off the year's high of $17.60 reached in January.

(Reporting by Steve James; Editing by Phil Berlowitz)

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