Sucheta Dalal :Aluminium Not for Long-Term
Sucheta Dalal

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Aluminium Not for Long-Term  

August 27, 2009


There is a new buzz word in the markets, "Aluminium prices are on an upward trend", but no one is really betting whether this trend will remain so.
Aluminium companies like Hindalco Industries Ltd (Hindalco) and National Aluminium Co Ltd (Nalco) are witnessing an amazing run in the Indian markets. Share prices of both these companies have zoomed 52% and 33%, respectively from 13th July to 26th August. However, this has nothing to do with the financials of both the companies.
During the quarter to June, the operating profit of both Hindalco and Nalco, fell by 20% and 77% as their sales also fell by 16% and 26%, respectively, from the corresponding period last year.
The consolidated earning of Hindalco, at the current market price of Rs106, is 31.93 times while Nalco's standalone earnings at the current price of Rs349 is 17.67 times.
One of the reasons for the share price increase is the firm price trend of aluminium in the London Metal Exchange (LME). Between mid May to 26th August, aluminium has surged almost 30% on LME, so on one part we can safely say that it was a reason behind share price rise for both Hindalco and Nalco.
Aluminium prices, which remained subdued for the first five months of 2009 saw a revival in the last three months on the back of March 2009 quarter supply concerns of Japanese primary aluminium buyers. Also, following an accident at Russia's largest hydroelectric power station in Siberia, RUSAL, the world's largest aluminium producer has guided production cuts of about 500,000 tonnes.
"All these factors acted in favour of aluminium, also evident from the hike in premiums that buyers pay for good western grade ingots, which has gone up to $75 to $80 from $ 55 in March, said Ashutosh Tiwari, metal analyst, KR Choksey Shares and Securities Pvt Ltd.
Due to the hike in the aluminium prices, Hindalco and Nalco are expected to post better set of numbers in September quarter and this could be another reason for the smart rally in the share prices of these companies, Tiwari added.
But is this run sustainable? According to Tiwari, the record LME inventories of 4.4 million tonnes remain a drag on the pricing of the metal. Also China's aluminium imports in the month of July 2009 at 131,724 tonnes were down by almost 51% over June 2009 imports of 267,861 tonnes.

Taking these factors into account Tiwari said he expects a correction in the aluminium prices on the LME as well as in the share prices of both Hindalco and Nalco. - Swapnil Suvarna

-- Sucheta Dalal