Stock Fundamentals

Aluminium Trend: Excess supply makes a deep dent

Meera Siva | Updated on: Aug 09, 2015
PO10_Roll_of_aluminium.jpg

PO10_Roll_of_aluminium.jpg

PO10_FC_Aluminium.eps

PO10_FC_Aluminium.eps

Producers are shifting to value-added products with an eye on long-term profits

The shiny world of metals that includes aluminium, copper and tin is facing a meltdown. The metal price boom — that peaked in 2008 — has been waning since the global financial crisis. From early this year, the price fall has been intensifying.

Among the metals hit hard by the commodity price correction is aluminium. The price of the metal at the London Metal Exchange (LME), which hovered below $1,700 a tonne in early 2014, crossed $2,000 a tonne last August. But it could not hold these levels for long. Since the start of 2015, LME prices have fallen by 12 per cent from $1,800 to below $1,600 a tonne. One reason for this is slackening of demand. Higher supply, especially from China, is also hurting. Besides, the changes in warehouse rules at the LME have helped reduce physical delivery delays.

Troubled stocks

No surprise then that the stock price of aluminium majors has taken a beating. Rusal, the world’s largest aluminium manufacturer, saw its stock price cut by half since February 2015. The US-based aluminium maker Alcoa also faced a similar share price rout.

The fate of Indian aluminium majors are no different. Stock price of large aluminium makers Nalco, Hindalco and Vedanta are down 22 per cent, 30 per cent and 35 per cent, respectively, in the last six months. And the outlook seems weak with things not expected to improve anytime soon on the price or demand fronts.

Cutting losses

Manufacturers of aluminium have therefore been finding ways to cut costs. For one, the breakeven price of the metal is around $1,700 a tonne for many metal producers. With prices at or below this level, they have been shuttering their facilities to reduce output and losses.

State-owned Nalco, for instance, reduced its aluminium output by 4 per cent in the first nine months of 2014-15 compared to a year ago, according to a Metal World report. This was after a 21 per cent reduction in 2013-14.

One reason why breakeven costs are high in countries, such as India, is the high cost of power. Power accounts for nearly 40 per cent of the metal’s production cost. Manufacturers in China and West Asia are able to produce at lower prices, thanks to cheaper power.

Indian producers, such as Hindalco and Vedanta, are now seeking a hike in import duty — from 5 per cent to 10 per cent — to help stabilise local prices.

Companies such as Nalco that own ore resources have been able to boost their profits by selling alumina, the raw material for aluminium.

Thanks to bauxite ore supply issues for other private miners, the alumina segment helped the company’s revenue and profits.

Adding value

These efforts may help reduce near-term stress, but long-term growth depends on the production of value-added products. For instance, demand for rolled aluminium sheets is expected to pick up as automobiles move away from steel to meet stricter emission guidelines.

Alcoa estimates that demand for aluminium auto sheets will quadruple in North America to 1.78 million tonnes by 2025. Hindalco’s US subsidiary Novelis has been investing heavily to expand its auto segment capacity in countries, including the US, China and Germany.

Alcoa has been on an acquisition spree to boost its share in producing value-added aluminium for the aerospace market. In contrast, ore and cash-rich Nalco has been investing in non-core segments, such as power, rather than creating more value-added downstream products, since the start of this year.

Published on January 23, 2018

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