Hindalco Industries Ltd’s shares rose this week after its overseas subsidiary Novelis Inc. reported good results for the June quarter. Novelis’ adjusted Ebitda rose by 8% over a year ago. While that is good news, even better for Hindalco and its counterparts is the firm trend in aluminium prices. On Tuesday, spot prices on the London Metal Exchange closed above $2,000 a tonne, a level not seen since 2014.
The current LME price is 5% higher than its early-July level and up 19% from the start of 2017. While higher realizations are always welcome, they are valuable for other reasons too. Costs are rising for aluminium producers. After announcing its March quarter results, Hindalco had flagged rising costs in its aluminium business. How it fared in the June quarter will be known on Friday, when it reports its results. Vedanta Ltd’s aluminium business had said its cost of production in the June quarter increased due to higher costs but also due to one-off factors.
Higher realizations would mean companies can sustain profitability even when costs are higher. Rising prices are also useful to spur sales and profit growth if output growth is relatively low. Hindalco’s aluminium plant has reached its designed capacity. Its effort will be to increase the share of value-added output to get a more profitable product mix.
In the June quarter, government data shows Hindalco’s output was nearly flat, rising by 0.8% over a year ago, while Nalco’s was up by 6.5%. But Vedanta Ltd’s group aluminium output has risen significantly as new capacity has come on stream. In its case, higher output and higher aluminium prices in FY18 can see its aluminium business benefit handsomely.
Apart from the aluminium price, physical premiums paid for immediate delivery also matter for companies. Vedanta had said that it got slightly higher premiums in the June quarter, over the preceding quarter. Comfortable supply conditions appear to have kept premiums in check.
The surge in prices seen recently is due to China taking further steps to shut illegal or polluting aluminium smelters.
The move itself is not new but confidence is building up that significant cuts will actually happen and result in a tighter supply situation. This week, China’s Shandong province said it had ordered plants producing 3.2 million tonnes of aluminium to shut, according a Financial Times report, or about 9% of China’s projected 2017 output. That led to the recent increase in prices, and if China follows through with more measures, prices can get further support.
The risks here are if China suddenly goes slow on the crackdown or worse, if producers hike output or reopen shuttered plants because it is viable to do so. For now, however, it’s advantage aluminium producers.