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Higher prices brighten outlook for aluminium companies

Higher prices brighten outlook for aluminium companies
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First Published: Mon, Apr 04 2011. 11 21 PM IST
Updated: Mon, Apr 04 2011. 11 21 PM IST
Last week, UC Rusalannounced its 2010 financial results and also issued its outlook for 2011. The aluminium maker expects demand for the metal to rise by 8.3%, after growing 9% in 2010, spurred by growing consumption in the Bric (Brazil, Russia, India and China) countries. Despite worries about China’s efforts to restrict energy consumption and inflation-fighting monetary measures, it expects aluminium consumption to rise by 12%.
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Another concern has been the high level of inventories at the London Metal Exchange (LME). It has not affected aluminium prices so far, proving the belief right that much of this inventory is tied up in financing deals, and will not enter the physical market. UC Rusal said that nearly 75% of LME inventories are covered by financial transactions, and it does not expect this position to change significantly in 2011.
The aluminium market favours firm prices, and most financial transactions linked to stocks are being retained as longer-term investments, according to a company statement. Investors in aluminium stocks will keep a close watch on China’s consumption growth and LME inventories for any signs of stress.
UC Rusal projects the metal to trade in the range of $2,500-2,600 (Rs1.12-1.16 lakh) per tonne throughout 2011. In 2010, prices were hovering inthe $2,000-2,500 per tonne range. Domestic producers will benefit from steady aluminium prices.
Hindalco Industries Ltdrecently announced financial closure of its Rs10,500 crore Mahan aluminium smelter project,which will produce about 360,000 tonnes of aluminium. This project is expected to start production in October. Another smelter project, with capacity similar to Mahan, and a 1,500 kilotonnes per annum alumina refinery, will start production by the end of 2012.
National Aluminium Co. Ltd (Nalco) recently reported its fiscal 2011 production figures, with metal production of 440,000 tonnes, up by about 2% over the previous year. In the current fiscal, its targeted production is 10% higher. But Nalco missed its target for fiscal 2011, so it may do so for fiscal 2012 also. Higher prices give its sales growth that much-needed cushion.
The Vedanta group’s aluminium business, managed by Sterlite Industries (India) Ltd and Vedanta Aluminium Ltd, too, will benefit from better realizations.
Average aluminium prices in the March quarter are about 9% higher than in the December quarter, and about 16% over the year-ago period. That pretty much sets the stage for good sales growth. But rising energy costs—coal and fuel oils—had crimped profit margins in the December quarter for the industry and may continue to do so in the March quarter as well. But higher product prices make the situation better, compared with the December quarter.
Graphic by Yogesh Kumar/Mint
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First Published: Mon, Apr 04 2011. 11 21 PM IST