On Wednesday, Hindalco Industries Ltd touched a new 12-month high of Rs 243 before closing a bit lower. The rise in its share price may have been prompted either by expectations of better performance in its domestic operations or even at its Canadian subsidiary Novelis Inc. Domestic aluminium producers will be relieved, as aluminium prices ended the year on a firm note, after falling halfway through the year.
Aluminium prices on the London Metal Exchange (LME) have risen by just 7% to $2,404 (Rs 1,08,420) a tonne, compared with the year’s opening level. That is a meagre increase, especially when you consider that its base metal cousin, copper, did extremely well, rising by about 26% in the same period. But aluminium has done well since June, when it fell to a low of about $1,850 a tonne.
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Demand for aluminium was quite solid during the year, as the world economy overall was in better shape, despite China’s efforts to cool economic growth and shivers caused by Europe’s economic worries. Alcoa Inc. estimated aluminium production in 2010 to increase by 13%. Global primary aluminium production rose by 3.5% in 2010, till November, compared with the year-ago period, based on data from the International Aluminium Institute (IAI).
Despite a 3.5% increase in production, LME inventories fell from 4.6 million tonnes (mt) in January 2010 to 4.3 mt. Physical inventories of primary aluminium with companies, measured by the IAI, have risen marginally, by about 5% to 1.3 mt. Alcoa forecasts world aluminium consumption to increase from 39 mt in 2010 to 73 mt in 10 years, achieving a compounded annual growth rate of 6.5%.
In the April-November period, India’s aluminium output rose by 8%, chiefly due to ramp-up of production at Vedanta Aluminium Ltd’s Jharsuguda smelter, according to the ministry of mines’ statistics. Domestic players are expanding capacity, anticipating rising demand which cannot be catered to by existing capacities.
Most global players, too, are expanding capacities. Despite an increase in supply, Alcoa expects that the market will remain tight in the next decade, due to demand outstripping supply. Indian firms are expanding existing capacities and also setting up new plants. Some have come up in 2010, but the bigger plants will come up in the next few years. India’s demand is expected to grow faster than global demand, as its industrial growth sustains momentum, especially the major users of aluminium—industries such as real estate, automobiles and engineering.
Aluminium prices are influenced by demand from financial investors and from actual users of the metal. The current rush for commodities provides a firm floor for prices, but it could quickly disappear causing prices to wobble. This was visible in June, as fears surrounding Europe spooked investors. The inventory overhang in aluminium too continues but, having weathered it for a year, it does not seem to be worrying investors. UC Rusal, a large aluminium producer, believes that most LME inventories are covered by financial transactions and will not come into the market before mid-2011.
Indian aluminium producers are in a good position, with aluminium prices already up about 30% since the lows of June. But it has underperformed compared with commodities such as copper. The question is if that will change in 2011, for that will determine how much of an upside there is for investors in aluminium stocks. As of now, there is little to suggest a runaway movement in aluminium prices. In 2011, Indian firms will benefit more from their capacity additions, which will contribute to a better financial performance.
Graphics by Naveen Kumar Saini/Mint
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