Hindalco well-placed in emerging demand-supply scenario for aluminium

The balance between the demand and supply in the global aluminium market could shift between 2023 to 2025 from a modest deficit in 2021-22 to a modest surplus as both demand and supply gather pace.

China has a small aluminium surplus, which could drop substantially or turn into a deficit due to an anticipated pickup in local demand and curbs on smelting capacity due to a cap of 45 million tonnes (MT) set by the Chinese government in 2017.

Even with the cap, China holds 57 per cent of global production capacity.

The global supply outside China could grow faster, as new capacity in Canada, Indonesia and India is being commissioned.

Key catalysts could include demand expansion from the growing green sector, as well as power supply growth in China, together with smelter restarts in the EU, and new project approvals. Lower inventory levels and positive macros (a weaker dollar index and interest rate cuts across major currencies) are likely to support aluminium prices in the range of $2,200 – $2,400 per tonne.

Under this scenario, prospects look better for Hindalco.

The company’s US-based subsidiary Novelis maintains its guidance of $525 per tonne of Ebitda (earnings before interest, tax, depreciation and amortisation). It has long-term supply contracts in place with Ball North America from its Bay Minette plant and it will probably see a rise in earnings growth trajectory since it is completing inventory destocking and plant commissioning.

Guidance by global players signals a positive demand outlook. There is a potential resurgence of the real estate sector alongside sustained momentum in automotive and renewables.

However, near-term guidance in terms of demand remains sluggish across geographies due to adverse economic conditions and sustained inflation.

EU smelters are still struggling with low LME prices and high energy costs. LME is the London Metal Exchange. But inventory has fallen and this could support prices as the global economy rebounds.

Chinese demand may be rated upwards due to a stimulus package backed by strong renewables activity and a surge in electrical vehicles (EVs).

The stimulus may be working since new housing starts grew by 4.7 per cent year-on-year (Y-o-Y) in China in November 2023 – the first positive reading since March 2021. Auto sales – a key area of demand for aluminium have also moved up.

LME prices remained stuck at $2,200. Costs for smelters have also dropped, which is a good sign if demand does rise.

A weaker dollar index is likely if the US Fed follows through on its recent dovish advisories by cutting policy rates. If we assume EU smelters will restart/ ramp up production, there will be a surplus unless China’s GDP surprises on the upside.

Apart from Novelis, Hindalco could see enhanced domestic coal security with the acquisition of captive coal mines. It is also invested in capex to augment downstream capacity amidst encouraging demand. Most of its production is non-LME linked.

The ongoing projects include a 350,000-tonne expansion via debottlenecking at Utkal Alumina and a 34,000-tonne aluminium extrusions plant in Silvassa, which has begun commercial production. Hindalco has also set up a dedicated facility to build the first all-aluminum cargo body for the new generation of Tata Ace EVs.

The stock hit a new 52-week high of Rs 571.95 on the BSE on Friday, before closing 2.5 per cent higher at Rs 570. It is up by around 25 per cent in the last 12 months.

According to Bloomberg, all six analysts polled in December are bullish on the stock, with an average one-year target price of Rs 600.