Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Aluminium: Shine to be missing - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Aug 31, 2002

    Aluminium: Shine to be missing

    From the lows in November '01, international aluminium prices climbed to a high of $1,438/ tonne on the London Metal Exchange, as U.S -- the largest consumer of aluminium -- registered economic growth of 5.1% YoY. However, non-ferrous metal prices have weakened since mid-year highs and aluminium prices are trading only 5.4% above November '01 lows.

    Post September 11 events, aluminium prices -- like all commodities -- collapsed, as the global economy came to a stand still. U.S registered negative GDP growth in third quarter of 2001 for the first time in a decade and business feared for worse to come. Reflective of the same, lows in commodity prices were touched couple of months after the U.S terrorist attacks. We reckon, resilience of U.S consumers and impressive growth in South & East Asian regions is likely to have supported the global economy to rise from the lows.

    Excess capacity built during the booms years of the nineties and subsequent economic slowdown has held back operating rates in the U.S. Utilisation rates in U.S industry are estimated at 75%, leaving room for ramp up without undertaking fresh business investments. Also, U.S industry continues to rationalize human resources to align with reduced business activity and increasing productivity to raise profitability. Dry up in business investments and higher unemployment affected consumer confidence. Additionally, absence in corporate earning recovery, accounting irregularity and lack of integrity among U.S analyst led to a collapse in stock markets. The meltdown in markets, leading to a negative wealth effect, seems to be further affecting the economy, especially consumer confidence.

    With fears of a double dip recession in the U.S, Aluminium prices have declined by 9% from their highs in March '02. Further, as compared to copper, aluminium prices have exhibited less firmness. Despite unremunerative prices, aluminium production in first half of 2002 grew by 4.5% YoY while U.S, Japan and Europe continue to experience lower consumption. As a result, global aluminium inventory has increased by 86% to 1.3 m tonnes since November '01 while copper inventories have grown 21% in the same period, which explains the underperformance in aluminium prices.

    The U.S aluminium industry is the largest in the world with production capacity estimated at 3.7 m metric tonnes (MMT). While the industry, globally, experienced a challenging 24 months, U.S producers were among the worst hit. Besides a decline in consumption, higher crude prices and a power shortage in Western and North-Western U.S led to steep rise in energy costs over 2000 and early 2001. Aluminium is a power intensive industry. With poor realizations and higher operating costs, we reckon, several smelter operations are likely to have turned unremunerative. As a result, an estimated 1MMT of smelting capacity has been pulled out from the U.S market. On global basis, estimates are placed at 2.2 MMT. Over the first five months of 2002, YoY production has been lower in the U.S. However, despite weak markets, production has registered positive growth in the last two months. Considering inventory levels in the system, swing plant capacity (plants turning operational on higher aluminium prices) and soft demand in key markets, the outlook for prices remains subdued. We reckon prices in 2002 are likely to range between $1,300-1,350/ tonne.

    Global Slowdown takes toll
    Consumption growth 1998 1999 2000 2001 1HFY02
    North America 6.7% 6.9% -0.5% -14.0% 1.9%
    Asia -15.0% 13.9% 12.9% -6.7% 3.8%
    Japan -10.8% 5.7% 3.7% -9.0% -7.4%
    Western Europe 2.1% 2.5% 4.0% -0.5% -3.0%
    China 9.9% 13.0% 15.4% 10.2% 9.9%
    World 1.0% 6.0% 5.9% -4.1% 1.0%
    Production growth          
    World 3.9% 4.3% 3.3% 0.2% 4.5%
    Source: Hindalco Industries Ltd.

    At the domestic market level, the recent budget has thrown up a challenge as basic customs duty rate on aluminium was reduced to 15% from 25%. Domestic industry is likely to further rationalize costs to remain competitive. The lower duty rate will lead to increased linkage between international and domestic aluminium prices. Therefore, producers will need to develop systems to better manage volatility in aluminium markets.

    The key consuming industries in the domestic market are electricals, transportation, construction and consumer durables. The power industry, among the first sector to be liberalized, has not attracted adequate investment due to lack of political will to push forward reforms. The weak link, leading to the malaise in the system, has been transmission & distribution (T&D) -- driver of aluminium consumption in the sector. Fresh reforms are targeting measures to increase efficiency in the T&D system, which could then attract investments into the sector. Having said that, we reckon, fresh power sector initiatives are unlikely to become visible in the medium term.

    Demand for aluminium, in the near term, is likely to be driven by transportation and construction. The transportation sector has exhibited an upturn over the past twelve months. Increasing levels of indigenisation in automobiles could lead to higher consumption growth. Further, sharp reduction in interest rates and fiscal benefits for individuals on purchase of realty has led to rising demand for new homes. Considering India is an emerging market, the long-term demand outlook for aluminium remains intact.



    Equitymaster requests your view! Post a comment on "Aluminium: Shine to be missing". Click here!


    More Views on News

    Hindalco: Strong Performance at Operating Level (Quarterly Results Update - Detailed)

    Feb 22, 2017

    Hindalco Industries has reported a 14.5% YoY increase in the topline while the bottomline came at Rs 3.2 billion.

    SAIL: Good Performance at EBITDA Level, Headwinds in the Offing (Quarterly Results Update - Detailed)

    Dec 21, 2016

    SAIL has reported a 21.4% YoY increase in the topline while the bottomline reported a loss of Rs 7.31 billion.

    Tata Steel: Domestic Realisation Disappoints, Loss continues... (Quarterly Results Update - Detailed)

    Dec 19, 2016

    Tata Steel has reported a 0.1% increase in the topline while the bottomline was in red in 2QFY17.

    Hindalco Industries: Strong Operational Performance Boosts Profitability (Quarterly Results Update - Detailed)

    Nov 30, 2016

    Hindalco Industries has reported a 1.1% YoY increase in the topline while the bottomline has accelerated by 255.4% YoY.

    Hindustan Zinc: Good Performance but Valuations at Premium (Quarterly Results Update - Detailed)

    Oct 25, 2016

    Hindustan Zinc has reported an 11% decline in the topline while the bottomline has declined by 15.4%.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 18, 2017 (Close)