The Hindu Business Line : Aluminium majors see uptrend for 3-4 years

Factors to count
Reports of production increases in alumina and aluminium in China to keep prices bearish.
Prices are more underpinned on alumina and energy.
Average prices during 2006 would be 25 per cent higher than 2005.

Mumbai , June 24

Is aluminium the base metal to watch out for?

Leading aluminium producer, Hindalco Industries, is obviously optimistic about the metal.

The Birla Group company is investing Rs 7,700 crore in a green field aluminium project taking its capacity from 4.25 lakh tonnes to 7.4 lakh tonnes. The company had recently announced that it has entered into an MoU with the Madhya Pradesh Government for its 3.25-lakh tonne green field aluminium smelter.

VOLATILE IN NEAR TERM

JSW Group, largely into steel, is also making a foray into aluminium. It is going in for a Rs 9,500-crore investment in the base metal on expectation that the price of the metal would tend upwards at least for the next 3-4 years.

Analysts tracking the movements in base metals believe that aluminium prices in the near term would be volatile.

In terms of an upward movement in prices globally, aluminium has lagged behind copper and zinc this year.

FROTH IS OUT

"Reports of production increases in alumina and aluminium in China is expected to keep aluminium prices bearish. Rising interest rates would also dampen demand,'' said Mr S. Kannan, Analyst, Sharekhan.

Commenting on the current scenario, analysts maintain that the speculative froth has gone out. The primary concern today, being the rising interest rate. They attribute the current volatility in aluminium prices to a genuine demand-supply mismatch.

According to them, average prices for aluminium during 2006 would be 25 per cent higher than 2005.

"Aluminium prices are likely to remain volatile in the near term. The trend will be more a direct function of global interest rate. Prices should bounce back by around October 2006, as the market will be in deficit.

However, the market will come back into balance by mid-2007. If that happens, aluminium prices will come off,'' said Mr Pritesh Vinay, Analyst, Edelweiss Securities.

According to Mr Vinay, aluminium prices are more underpinned on alumina and energy. Alumina prices are expected to come off, with new capacities coming up in China by the end of the year. Aluminium along with other base metals were at their lows during the last part of 2001. Base metals have been slowing edging up since then facilitating primary producers of metals a growth in their topline as well as bottomline.

During the fourth quarter of 2005-2006, Hindalco's revenues from its aluminium business grew by 18.5 per cent to Rs 1,726.3 crore and profit jumped by 61.2 per cent to Rs 713.1 crore.

Demand seen strong

Hindalco's Managing Director Mr Debu Bhattacharya is confident that demand for aluminium would remain strong.

While rising interest cost would be a stumbling block to demand for base metals including aluminium as borrowing costs would go up, Asian demand would nevertheless be buoyant, says Mr Kannan of Sharekhan.

Industry members expected the metal to average around $2,400 a tonne.