Last week saw news that the US and China may call a truce on their trade war. While that news was played down subsequently, a trade deal can be a crucial turning point for metal companies. A slowdown in China’s economy is one of their main worries, as lower demand could mean weaker prices. That matters for domestic aluminium maker Hindalco Industries Ltd.

Hindalco’s September quarter, or Q2, results show that its overseas operations are doing well while its domestic business is showing a mixed performance. Its overseas subsidiary Novelis Inc.’s Ebitda (earnings before interest, tax, depreciation and amortization) rose by 17.5% to $355 million in Q2 from a year ago, and increased 6.3% over the June quarter. While shipments were up by only 1% over a year ago, an improved product mix and savings from operational efficiencies helped profitability improve. The completion of the Aleris Inc. acquisition is a key event to watch out for.

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In Hindalco’s domestic copper business, copper cathode volumes declined by a fourth due to a planned maintenance shutdown. Sequentially, output was down by 11% and will return to normal levels in the second half. Due to lower output, the copper division’s Ebitda was down by 16.9% from a year ago, and also due to lower treatment and refining charges. Sequentially, Ebitda was up by 15.7% indicating an improved situation. The rising output of copper rods, which earn better margins, would also have contributed to better margins.

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The aluminium business had a mixed quarter though. If we take the proforma numbers of the company’s standalone aluminium segment that include Utkal Alumina Ltd’s numbers, then Ebitda rose by 13.3% over a year ago. But it declined by 11% sequentially. Since volume is stable, share of value-added products, realizations and how costs move are what will determine changes to profitability.

A sharp increase in power and fuel costs is visible in its standalone results. Compared to the June quarter, aluminium prices are down by 9%, while domestic premiums are down by 28%. Value-added products’ share has risen but has been restrained by competition from imports. Hindalco has been using cash surpluses to lower debt.

The company’s profit before tax (standalone plus Utkal) rose by a fifth over a year ago but fell by 3.9% sequentially. The key risk to monitor in its domestic aluminium business is whether prices continue to decline or recover. The copper business should do better in the second half, as volumes recover post-shutdown. The international business is a bright spot.

Hindalco’s shares are down by 10.4% from a year ago but are up by a fourth from their July lows. How the company does from here will depend more on external factors such as China’s economic strength and a patch-up on the trade war front. These will likely influence aluminium realizations and its performance in the second half as well.

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