Alcoa Inc is expected to report a small quarterly profit next week but Wall Street is unconvinced the company can post higher numbers with the price of aluminum only slowly inching up from the recession.

Investors remain skeptical about aluminum fundamentals, Morgan Stanley analyst Mark Liinamaa wrote in a research note.

Alcoa's downstream, or consumer businesses were likely to improve, but leverage to the aluminum price (is) likely a key focus again this quarter, he said.

Aluminum, used in automobile and plane manufacturing, and for kitchen wrap and beverage cans, reached a peak of $3,380 per tonne in July 2008. But it slumped 35 percent later as the global economy went into recession and has only slowly risen.

Although the metal was selling at an 18-month high of around $2,400 per tonne on Friday, it has only gained about 3.3 percent during the first quarter.

On average, Wall Street expects Alcoa, which traditionally kicks off the quarterly earnings season, to post a first-quarter profit of 10 cents per share on Monday, a big improvement on a loss of 59 cents per share in the same quarter last year, according to Thomson Reuters I/B/E/S.

That earnings estimate excludes any charges and special items, the company might report. Alcoa said on April 5 it would take a $120 million charge for shutting down two idled smelters, in Maryland and North Carolina, while a charge for healthcare costs is also expected.

On Friday, J.P. Morgan downgraded Alcoa's investment rating to neutral from overweight, sending its shares down almost 3 percent to $14.43 on the New York Stock Exchange.

The bank's analysts also cut Alcoa's share price target to $16.50 from $21.50, saying the company may struggle with an inventory charge, weak volumes due to a customer dispute and struggling margins as the year goes on.

Although Alcoa has taken significant costs out of its business by closing high-cost operations and through additional procurement and productivity savings, we think it will still struggle to generate attractive returns at our strategist's 2011 aluminum price forecast of $0.92/lb ($2027 per tonne), J.P. Morgan analysts said in a note to investors.

Morgan Stanley's Liinamaa noted aluminum has rallied, but investors remain skeptical of fundamental price support and/or the company's ability to deliver earnings leverage.

We continue to think aluminum prices can remain stable near-current levels and that cost cutting has been reasonably effective.

He said downstream business was a likely catalyst to boost value. Recent positive comments in the aerospace and industrial sectors suggest downstream demand will show improvement in the second half of 2010, he wrote.

Desjardins Securities' analyst John Redstone said rising input costs, especially for electricity and bauxite, the raw material for aluminum, plus an improvement in supply-demand dynamics should push the average aluminum price higher.

Further signs of improving demand, such as tightening scrap supply and higher prices for semi-fabricated goods, should provide 'floors' for the primary aluminum price, he wrote.

Fraser Phillips, of RBC Capital Markets, said cost pressures were the main negative for the industry, along with end-use weakness. The weaker U.S. dollar and higher energy prices will partially offset the benefit from higher aluminum prices and cost reduction efforts.

We expect Alcoa's recent price increases in the North American can sheet business to result in significant lost volume, he wrote. We believe the company continued to experience weak market conditions in the aerospace and industrial gas turbine markets in the first quarter.

(Reporting by Steve James, editing by Leslie Gevirtz)

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