Indian aluminium players to gain of two fronts

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Indian aluminium players to gain of two fronts

Postby SHARK » Tue Apr 17, 2018 6:50 pm

Among base metals, aluminium prices have taken an abrupt turn post US sanctions on Russia's Rusal, which is the biggest producer of aluminium after china. The markets have already reacted to the news sending positive signals to international aluminium prices, which surged about 16% to $2,307 per tonne as against $1,990 a tonne in April 2017. On expected lines, the share price of Rusal tumbled 56% since the US imposed sanctions.

Why does Rusal matter?
Rusal produces about 3.7 MT of aluminium annually, which is about 6% of total global aluminium production of 63 MT in 2017. Excluding China which accounts for 51% of global production, Rusal's share at 12% impacts market dynamics.

With restrictions on Rusal, which produced 3.7 MT of aluminium in 2017, the market fears a supply crunch at a time when the industry is staring at a deficit of close to 800,000 tonne globally. In a worst case scenario, based on Rusal's trade, it is estimated that about 2 MT of its supply could be affected, which is about 3% of the total global aluminium production.

Moreover, Europe accounts for 45% of Rusal's volumes, followed by 18% for the US. If Europe can absorb the additional supply, part of the worries could ease. However, the market is not yet sanguine on this.

It is also evaluating the indirect impact it would have on the overall aluminium market. For instance, Swiss based commodity trader (Glencore), which has 8.75% stake in Rusal and a billing of close to $2.4 billion in 2017 may restrict procurement that pertaining to its exposure to the US market. Other direct and indirect intermediaries which supply to the US markets could face similar heat. This could lead to higher demand for other aluminium producers.

India in a sweet spot
For India, the opportunity knocks on two forms. One, Indian companies will be able to increase supply as a result of rising demand. Two, they will benefit from higher international aluminium prices.

Increase in aluminium prices would directly boost profitability of Indian companies. The biggest beneficiary of this would be Nalco and Hindalco whose share prices have already appreciated. Most of the impact would be seen in the first quarter of the current fiscal, which could be temporary if supply-side issues are resolved.

The Street has taken a base price of $2,200 per tonne while estimating FY19 earnings. It would be prudent to see how much aluminium prices fall from the current elevated levels. In a recent media interview, Anil Agarwal, Chairman, Vedanta, indicated that aluminium prices may trade around $2,500-3,000 a tonne as against current levels of $2307 a tonne. If prices move further and sustains there for a longer period of time, it would be a big positive for Indian aluminium producers.
Price is what you pay. Value is what you get.”

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