Hope for Hindalco, Nalco investors as aluminium demand may outstrip supply

Though volatile, most analysts don't expect prices to decline further

Aluminium has seen high volatility in the global metals market in the past two months. In mid-October, LME prices hit multi-year highs of $3,198 per tonne. Prices then corrected steeply to $2,550 in early November before stabilising and moving up to around $2,700.

Volatility is likely to continue. Most analysts expect demand to drop, due to a drop in global growth rates and China cooling down as well. But there are estimations that supply could tighten as well, due to high energy costs. Aluminium production is very power-intensive, since bauxite ore is put through electrolysis to produce the metal. Hence, smelters are cutting back production.

The Q2 (July-Sep 2021) saw strong aluminium demand outside China with a pickup across consumption sectors like construction, packaging. One key customer – the auto sector – is struggling due to chip shortages. The aviation sector is also in slowdown. But most analysts think prices will not fall through the second half (H2) of 2021-22 due to demand staying in surplus over supply.

India is a potential growth market for aluminium due to the infrastructure and construction focus. Fitch estimates domestic consumption could hit 9.5 million tonnes (MT) by 2030, from 2.6MT in 2021-22. Current domestic production is about 4 MT.

This is good news for Nalco (National Aluminium Co) and for Hindalco, which belongs to the AV Birla group,. In a presentation, Hindalco said, global aluminium production during January to September 2021 was up 5 per cent to 50.6 MT, with the Chinese share of production at 29 MT. But consumption was 51.5 MT with China consuming 30.1 MT, leading to a reduction in inventory.

Hindalco, which also owns the world’s largest maker of value-added aluminium products, Novelis, registered consolidated Q2, 2021-22 revenues from operations of Rs 31,237 crore, which was 23 per cent growth YoY over Rs 25,283 crore (Q2, 2020-21) and 5 per cent growth QoQ over Rs 29,657 crore (Q1, 2021-22). The PAT (adjusted for continuing operations) was Rs 1,785 crore, versus a loss of Rs 569 crore (YoY) and a profit of Rs 1,492 crore (QoQ). The EBITDA of Rs 8,048 crore, up 56 per cent year-on-year over Rs 5,158 crore (YOY) and up 21 per cent QoQ over Q1, 2021-22 at Rs 6,650 crore.

Hindalco also has exposure to copper. Copper demand is estimated around 80 per cent of pre-Covid levels. Segment revenues were Rs 4,774 crore for copper, with Novelis contributing Rs 22,185 crore to aluminium revenues and standalone Hindalco aluminium production contributing Rs 4,796 crore. Importantly, Hindalco had high coal stocks and its own captive power capacity and hence did not see significant rise in Q2 energy costs. Nalco also had record profits in H1, 2021-22, benefiting from high prices. Nalco registered 7.8x growth in H1 profit after tax (PAT) with over 70 per cent of the total aggregated PAT being generated in Q2.

The share prices of Hindalco and Nalco have seen large swings. Hindalco is up 83 per cent YoY but it is down 12 per cent in the last month. Nalco is up 122 per cent YoY and down 9 per cent in the last month. There could be an upside to both stocks if aluminium prices stabilise and move up.