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Metals: On a hot trail - Views on News from Equitymaster
 
 
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  • Oct 5, 2004

    Metals: On a hot trail

    The good news is that the Indian markets have been firing on all cylinders since the last 3-4 months. This can be gauged from the fact that the Sensex has appreciated by about 18% since July 2004 till unto last week. However, the better news is that aluminium stocks like Hindalco and Nalco have outperformed this benchmark index by a comfortable margin by logging in gains of 39% and 30% respectively. In this article, we try to determine the reasons for this outperformance.

    Before getting onto the reasons for the stock price rise in Hindalco and Nalco, it must be noted that Hindalco, which is the largest aluminium producer in the country, also has a substantial presence in the copper segment. As far as Nalco is concerned, apart from it having the second largest aluminium producing capacity, it has a significant presence in alumina (raw material for aluminium), more than half of which is exported.

    Source: London Metal Exchange

    As can be seen in the charts above, both, aluminium and copper prices have strengthened since July 2004. While aluminium prices have improved by 8% in the last 3 months, copper prices have surged by 15% during the period. Alumina prices have also seemingly sky rocketed by about 25%-30% since July 2004. Much of the credit for the surge in prices can be attributed to the continuation of the strong demand from China for these metals and consequently, their raw materials. Reports of hedge funds buying in anticipation of a further rise in prices as the demand continues, is also aiding the upward momentum. It must be noted China accounts for almost 25% of world aluminium consumption and about 20% of world copper consumption. The demand for metals is also being supported by the gradual global economic recovery, especially the US.

    Though the demand for these metals has continued to remain strong, there has been a lack of simultaneous increase in equivalent production (seemingly owing to many smelters halting production because of cost inefficiencies that crop up on the back of soaring raw material prices). The effect of this is being seen on aluminium and copper inventories, which are currently at multi-year lows, putting upward pressure on prices.

    The strengthening prices are but natural a big positive for cost efficient producers like Hindalco and Nalco who can now have better realisations on their sales. It must be noted that the domestic price rise of aluminium (up 2%-3%) and also copper (4%-5%) have not kept pace with the international prices in the last 3-4 months. This prompted Nalco to raise aluminium prices yesterday by Rs 2,500 per ton. Further, this rise would also help aluminium players to offset partially, the adverse impact of the rise in other raw material prices like that of coal and coke, which have reportedly strengthened by 10%-15%. Further, for Hindalco, with global copper mining capacity slated to pick up on the back of strong LME prices and the benefits to accrue to the company from the partial internal supply of concentrates, the company would benefit from improved treatment and refining charges, thus helping ease the pressure on copper margins.

     

     

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