Why aluminium prices are unlikely to fall

A pick-up in global demand is vital for higher LME aluminium prices. This would uplift investor sentiment. Photo: Reuters
A pick-up in global demand is vital for higher LME aluminium prices. This would uplift investor sentiment. Photo: Reuters

Summary

  • Lower aluminium prices along with elevated energy costs are a threat to the margins of Hindalco and Nalco

Shares of aluminium producers such as Hindalco Industries Ltd and National Aluminium Company Ltd (Nalco) have moved in tandem with the demand-supply dynamics of the metal. These shares touched 52-week highs in March when supply risks arose from the Russia-Ukraine war. However, shares of Hindalco and Nalco plummeted later due to muted demand conditions and are now 32-40% below their 52-week highs.

Lower aluminium prices along with elevated energy costs are a threat to the margins of these companies. However, some respite appears to be on the anvil. Aluminium price on the London Metal Exchange (LME) has been range bound at $2400-$2500 per tonne in the past month after seeing a sharp correction from the high of $3,877.50 per tonne in March.

Getting steady
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Getting steady

Supply risks could arrest a further fall in LME aluminium prices. Many smelters in Europe are running at cash losses considering spot metal and energy prices; however, existing gas price hedges are keeping them in the black, pointed out analysts at Kotak Institutional Equities. “Smelter curtailment announcements have started in Europe and, as existing hedges expire in the coming months, we expect more curtailments to be announced," they said.

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Why aluminium prices are unlikely to fall

Further, heat waves in China, an important market in the metals industry, are leading to power shortages. This is a hindrance for production of this metal, which is energy intensive.

Still, worries because of subdued demand and high energy costs remain. A series of lockdowns in China have weighed heavily on demand, which contracted by 5.9% year-on-year (y-o-y) in Q2CY22 against production growth of 3.9% y-o-y, according to Kotak analysts. The country is introducing a slew of measures to revive the economy, but such monetary and fiscal stimulus would take time to cause a notable difference. Analysts expect Chinese demand to recover in Q4CY22 because of stronger seasonal restocking, pent-up demand on a low base, and materialization of stimulus steps. But, in ex-China regions, demand is likely to stay muted. Thus, profit margins of Indian aluminium producers in Q2FY23 are likely to fall sequentially. However, with stable metal prices and expectation of increased domestic coal availability, margins are expected to improve thereafter.

A pick-up in global demand is vital for higher LME aluminium prices. This would work in favour of investor sentiment. Analysts at Kotak forecast LME aluminium price of $2,650/2,600 per tonne in FY2023/24E compared to $2,503 per tonne on 26 August.

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