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Aluminium: Has the cycle turned? - Views on News from Equitymaster
 
 
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  • Apr 4, 2002

    Aluminium: Has the cycle turned?

    With the expected turnaround in the global and domestic economy, commodity prices have been on the rise, as cyclicals are among the first to benefit from higher demand. Non-ferrous metals have firmed up in the international markets. However, the rise in aluminium has been subdued. For the quarter ended March 31st, aluminium prices on the LME are higher by only 4%. While on YoY basis prices are still lower by 5%.

    On the other hand, over the concerned quarter, couple of the aluminium pivotals have registered a significant rise on the bourses. Nalco, the Government owned integrated aluminium producer, has seen its stock price rise by 67%. This is largely due to the disinvestment programme moving forward. As per reports, Nalco is expected to be divested in the next three months. Hindalco, the largest aluminium producer in the country, has seen a rise of 22% on the bourses. The A.V. Birla group recently lost out to Sterlite Industries in bidding for Hindustan Zinc.

    The rise in the stock market could be due to expectations of further strengthening of the base metal prices. Global inventories are low, capacities in the U.S have been shut due to a weak cycle & higher energy costs and a global recovery is likely to re-build demand. These factors could tilt the demand-supply equation resulting in higher aluminium prices.

    That said, domestic aluminium production has slipped by 3.2% during the first ten months of FY02 as compared to 5.8% growth registered in the same period of the previous year. However, after sliding for two consecutive months in November & December '01, production has risen by 3% for January '02. With a likely turnaround in the domestic economy, aluminium production is likely to report positive growth in the last two months of FY02. Much of the slowdown over the past twelve months commenced during the fourth quarter of FY01, which lowered annual production growth to 3.6%.

    The recent budget has reduced import duties on most non-ferrous metals to 15% compared to the earlier 25%. This is likely to result in increased sensitivity to international prices, which could weigh down on domestic realisations. Indian aluminium manufacturers are amongst the lowest cost producers of the metal. Consequently, threat of imports could be over rated. However, as realisations come under pressure, margins could slide leading to lower return ratios. The industry is likely to counteract by further increasing efficiency.

     

     

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