Demand, margin worries weigh on aluminium producers as crises continue

Metal's price has declined by a third in two months on LME; analysts differ on how supply-demand situation may pan out

The global aluminium supply and demand situation may have altered for the worse. Prices have dropped 35 per cent in the last two months on the LME. Some of the concerns are due to demand reduction in China during the lockdowns, while global demand elsewhere has also been hit by high inflation.

Margins are likely to be affected by high fuel and power costs. Demand in China is expected to fall by 8-9 per cent through the June quarter. Overall, global demand is still likely to be marginally higher than supply and maybe a little more if there are supply disruptions.

On the assumption of higher costs and lower demand and realisations, most analysts have cut Ebitda (earnings before interest, taxes, depreciation, and amortisation) and revenue estimates in financial year 2022-23 (FY23) for key producers like Hindalco, Nalco, and Vedanta. There is consensus about the trends, but serious variations in the quantum of estimates.

Some analysts see supply disruptions being greater than demand and a possible demand growth of 2 per cent over FY22 levels. This would mean price support at current levels. Others see marginal demand growth and much lower levels of supply disruption, which would mean factoring in further downtrends in price.

Power costs are a key factor and so are environmental concerns in China, along with Russian sanctions. Some smelting capacity will shut down due to unviable high energy costs. China is putting curbs on all emission-heavy industries — this puts a ceiling on smelting capacity until there’s a giant shift to captive renewables within the metals industry. Russia seems to be processing only about half the alumina it was handling before the Ukraine War and there’s an attempt by customers to shift from Russian aluminium.

On the supply side, therefore, high energy prices may mean curtailment. On the demand side, most analysts are looking for a revival driven by rebound in China in the second half of the fiscal. The downside risks include lower aluminium prices and lower scrap metal spreads (for Hindalco’s subsidiary Novelis), coupled with high energy costs (and transport costs) for every producer. Disruptions in ore supply or high alumina prices could also be a factor.

One securities house sees Hindalco’s standalone Ebitda dropping by 19-20 per cent in FY23 from previous estimates and profit after tax (PAT) estimates have been downgraded by 27 per cent. It also sees Novelis’ Ebitda declining 12 per cent in FY23. This is based on the assumption that LME aluminium prices will average at $2,600 per tonne, down from the earlier estimates of $3,000. National Aluminium Company (Nalco) is expected to see a dip of 9 per cent in revenue and 33 per cent in Ebitda. Hindalco has a ‘reduce’ recommendation with a target of Rs 295, while Nalco has a ‘sell’ recommendation with a target price of Rs 52.

Another analysis has a 5 per cent year-on-year cut in Ebitda estimates for FY23 for Hindalco (consolidated) with a fair valuation of Rs 540 based on FY25 timeframe. For Nalco, it has cut Ebitda estimates by 18 per cent with a fair value of Rs 95. This is based on a price average of $2,700 per tonne on LME in FY23.

At its current price of Rs 335 apiece, Hindalco has seen its share price decline 22 per cent in the past month. Nalco is at Rs 75, after a retraction of 23.5 per cent in the past month.