Aluminium seen as an outlier among metals; Hindalco better placed

The suspension of bauxite exports by Guinea in Oct'24 has tightened the alumina market

Most industrial metals are expected to stay bearish at least in early 2025. However, aluminium could be an exception. Aluminium prices have run higher to $2,600 per tonne levels due to a tight supply-demand equation.

 

The metal could go into a supply deficit in 2025 due to a combination of production cuts by Russia, civil unrest in Mozambique affecting a smelter, Guinea’s bauxite export ban, and China’s withdrawal of 13 per cent tax rebate to aluminium exporters. Demand may also slow down in Europe and in China’s property sector, but despite that Beijing’s aluminium demand is expected to grow about 2 per cent in 2024, and to sustain in 2025.

 

The suspension of bauxite exports by Guinea in October 2024 has tightened the alumina market. Meanwhile, Alcoa closed its Kwinana refinery in Australia and Rio Tinto has announced a closure on declaration of force majeure at its Queensland refineries due to gas shortages. Guinea exported 14.1 million tonnes (mt) of bauxite last year, and plays a crucial role globally, translating into 6-7 mt of alumina (the global market size is 137 mt). Hence, alumina may remain tight in the medium term.

 

Rusal of Russia produced 3.8 mt per annum (mtpa) of aluminium in 2023 and says it will cut its aluminium output by up to 500,000 tonnes due to the high cost of alumina. The first stage of its programme will reduce output by 250,000 tonnes, equivalent to around a 6 per cent production cut. Rusal is the biggest producer of aluminium globally outside of China. 

 

Physical premiums in aluminium have been rising in Asia for four consecutive quarters. A $50 per tonne increase to effective all-in aluminium-realised prices increases Ebitda by 4 per cent for domestic integrated aluminium producer National Aluminium Company (Nalco), and by about 2 per cent for private sector majors Hindalco and Vedanta.

 

Among Indian producers, Nalco looks to have the most upside. It had a good Q2FY25, with Ebitda of Rs 1,550 crore, which was well above consensus and 66 per cent higher sequentially. The performance was primarily driven by rising alumina prices that averaged $503 per tonne during the quarter (up 18.2 per cent quarter-on-quarter or Q-o-Q) as well as strong realisations in primary aluminium.

 

The public sector company’s net cash position improved to Rs 3,590 crore in H1FY25 vs Rs 2,540 crore in FY24. Net working capital expanded during H1, as inventories and receivables tend to be pro-cyclical and move in line with the trend in prices. Per tonne, alumina prices are averaging at $640 quarter-to-date vs $503 in the previous quarter.

 

Sales volume could improve in H2FY25. Ebitda could grow by 20 per cent year-on-year (Y-o-Y) to Rs 5,600 crore for FY25. Nalco could benefit from the near-term price strength, an expansion of 1 mtpa in alumina capacity, and a move into captive coal mining that would slice costs.

 

However, Nalco has rallied 95 per cent in the last year although it has been flat in the past 2 months. At a trailing PE of 14x, it could be highly priced. If the supply disruptions normalise, Nalco could see a correction from current levels.

 

Alumina is now trading at 29 per cent of aluminium prices, up from a five-year average of 16 per cent. Around 11-12 mtpa of new alumina refinery capacity, mainly in China, is due to be commissioned in CY2025. This could turn the supply deficit into a surplus. That in turn, may lead to a steep price correction. 

 

Aluminium prices of $2,600–$2,650 per tonne have been range-bound in the past two months, notwithstanding the alumina cost-push. Alumina could correct back to $450 per tonne, if the metal goes into surplus. Hence, the normalisation of supply-side issues would lead to a risk to the current price levels.

 

Vedanta’s share price, too, has rallied 91 per cent in one year, while Hindalco’s is up by a little under 12 per cent during this period.

 

According to Bloomberg, 22 out of 28 analysts polled are bullish on Hindalco with a target price (TP) of Rs 750 (upside potential of 18.5 per cent), while only 5 out of 11 are positive on Nalco (upside potential of 12.7 per cent on the TP of Rs 256. For Vedanta, 9 of the 15 analysts polled are positive, their TP of 525.5 indicates an upside potential of just 5.8 per cent.