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Aluminium: Melting prospects

Sep 27, 2001

Metal stocks in Indian have followed the market trend since the beginning of the year 2001. While aluminium and steel stocks are trading near to their 52-week lows, copper stocks have been better performers. With a downtrend in metal prices following a slump in the global demand, earnings quality of companies is likely to get impacted (on the back of lower realizations). According to the latest survey by the Associations Council of Confederation of Indian Industry (Ascon), aluminium production recorded a steep decline of 8.5% during the period April-September 2001. The downtrend was mainly due to the slowdown in the sales of commercial vehicles, which reported a drop of 19% during the same period.

Not only the domestic markets but exports also posted dismal growth rates. During the first six months of FY02, aluminium exports registered a sharp drop of 24%. Decline in global aluminium demand and a fall in LME prices took toll on India's aluminium exports. Aluminium prices, which were trading at an average of US$ 1,660 per tonne in January 2001 are now at US$ 1,320 per tonne, a fall of 18%. The impact was clearly visible on the domestic aluminium prices. In the Mumbai market, aluminium ingot was sold at Rs 93 per kg in August '01, the lowest since December '00.

The US attacks have further contributed to the already grim scenario. Reduction in aircraft production in US is likely to reduce the aluminium demand. (Boeing has already announced a 20% cut in aircraft production for 2002). Even though the aviation sector accounts for a marginal 2% of the total consumption of aluminium in the world, it's a high margin business. America's largest aluminium company, Alcoa and Pechiney of France have the greatest exposure to the aluminium markets. These companies are likely to see a sharp dip in their revenues in the coming quarter with a slump in demand. Their stock prices have already reacted to this development.

For the Indian markets, it would not have a direct impact on companies. However, price movements on the LME could affect financial performance of aluminium companies. Domestic majors including Hindalco and Nalco have not yet announced any price revision. But the concern is already reflected from the stock price performance of these companies. While Hindalco recently hit its 52 week low and has come down by 33%, its group company Indal has recorded a loss of 36% since the beginning of the year 2001. This is in line with the Sensex, which has sunk by 34% during the same period.

The near term recovery in the aluminium markets is unlikely and could affect the export growth of Hindalco and Nalco. For Hindalco, aluminium exports account for 15% of total revenues while the figure is 40%-45% for Nalco. Although, it is early to predict impact on these companies' exports, their future contracts are expected to be on the lower side in absence of economic recovery.

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