Aluminium prices have risen sharply from over a year ago, and are up by around 24% on the London Metal Exchange (LME), but that rise has been blunted in recent months. Since the beginning of June, its price is down by around 7%. Since domestic aluminium prices track international prices, the effect has been also felt locally.

The Reuters news agency recently reported that National Aluminium Co. Ltd (Nalco) has cut prices by around 3,000 a tonne, following up on a 5,000-a-tonne cut in prices in June. There is no buffer from foreign exchange rates either, as the rupee is up by around 5% from a year ago against the dollar. The rising cost of inputs such as coal and fuel adds to the worry for aluminium companies.

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These worries may not reflect in the June quarter results. The average LME price during this period was around 4% higher than the preceding quarter. Alcoa Inc. reported its results recently, showing an 11% jump in quarter-on-quarter sales, and a 15% jump in profit from operations. It expects global primary aluminium demand to increase by 12% in 2011, unchanged from its previous quarter’s forecast. But its expectation of growth among user industries has changed, which could explain some of the nervousness on prices.

Alcoa expects the automotive sector to now grow by 4-8%, down from 5-11% projected during the March quarter, and commercial building and construction to grow at 1-3%, compared with 2-3%.

But aerospace growth is expected to sustain, while the outlook for beverage cans has improved due to China.

North America and Europe are the main regions contributing to the downward revision in growth.

While the realizations from primary aluminium may come under pressure, those from selling alumina and value-added products are expected to improve.

Also, Alcoa reported inventories being flat on a sequential basis. A large part of inventories are locked up in financial deals, which provides a floor under prices but poses a risk if they re-enter the market at some time.

India continues to be one of the strong growth drivers, with aluminium demand expected to rise by 15% in 2011, after rising 14% in 2010. The slower industrial output seen in recent months could see some impact on that figure.

Domestic aluminium stocks have begun reflecting these concerns. Hindalco Industries Ltd’s price, for example, is down by 11% since 1 June, while Nalco is down by 12%. Hindalco’s performance is more dependent on how Novelis Inc. performs—its Canadian subsidiary which makes rolled flat products.

A tight supply situation and a rising demand from emerging markets is expected to see Novelis continue to report good results. That should help Hindalco report a better performance in aluminium in comparison with peers.

Graphic by Sandeep Bhatnagar/Mint

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