Home / Markets / Mark To Market /  With aluminium prices near 1-year high, India’s smelters reap benefits

India’s aluminium manufacturers are getting a shot in the arm with a steady increase in the metal’s prices because of supply-side bottlenecks in the world’s largest primary aluminium producer, China.

Aluminium prices on the London Metal Exchange (LME) scaled a one-year high of about $2,650 a tonne last week, bringing the year-to-date increase to almost 35%. Demand has not cooled and the growing disruptions in supply from China are driving prices up. The disruptions are largely because of new emission rules, power shortages and floods in July.

Aluminium prices are expected to stay elevated in the near term, according to analysts. “With stronger-than-estimated demand, we now see the aluminium market in deficit from CY2021. A multi-year deficit market and tepid supply response should keep prices higher for longer," said analysts at Kotak Institutional Equities in a note.

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Domestic aluminium prices are driven by the landed cost of imports. For Indian aluminium makers such as Hindalco Industries Ltd and Vedanta Ltd, such elevated prices mean better realizations. No wonder, their shares have climbed in the past week. Hindalco gained 8.5% last week, while Vedanta climbed 4.8%.

Given the outlook on aluminium prices, the earnings outlook for the two firms has improved. As such, a strong June-quarter performance has buttressed their valuations.

Hindalco’s domestic aluminium business reported a 29% sequential increase in Ebitda for the June quarter. Ebitda is earnings before interest, tax, depreciation and amortization. This was despite volume declining 8% sequentially due to the impact of the lockdown. The firm attributed this primarily to favourable macros, improved product mix and better operational efficiencies. “The profitability of the Indian aluminium business has been rising, driven both by higher realizations and, more importantly, lower costs as domestic coal availability has improved," said analysts at Credit Suisse Research in a 23 August note.

Credit Suisse analysts have raised their FY22 LME aluminium price forecast to $2,670/tonne (from $1,900/tonne). Among base metals, the brokerage is most positive on aluminium, given its structural use in a decarbonizing world for expanded grids, lighter vehicles and solar photovoltaic projects. The supply of the metal is likely to be tepid, they said.

Vedanta, too, stands to benefit from rising aluminium prices. That said, the company has diversified interests in other metals, power, and oil and gas.

Given the outlook on international aluminium prices, it is no surprise that companies want to add capacity. Hindalco’s US subsidiary Novelis plans to expand capacity in the downstream business. Synergies from the Aleris acquisition also bode well. The benefits may exceed expectations with the integration in China alone expected to be $100 million, according to analysts at Motilal Oswal Financial Services Ltd.

A 24 August report by Crisil Ltd forecasts capex worth 25,000 crore over the next two fiscal years, which may augment smelter capacity by 10%. “Domestic producers are looking to increase the share of downstream capacities to more than 35% from 20% over the medium term. This will burnish realizations and strengthen business profiles," the report said.

Meanwhile, there are risks. Global metal prices could come under pressure if the outlook on demand gets hit. One way of that happening would be the US Federal Reserve beginning to withdraw its accommodation. For now, though, Indian smelters can reap the rewards.

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