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Aluminium: A re-take

Oct 14, 2003

After steel, aluminum stocks are now proving their mettle on the bourses. Just to put things in perspective, in the calendar year 2003 (to date), aluminium stocks have managed to outperform the BSE Sensex comfortably. While the Sensex has notched gains of 41% in the period under consideration, the stock price of Hindalco has appreciated by 86%! Its peer, India’s largest alumina producer and second largest aluminium producer, National aluminium (Nalco), has also appreciated by 50%. In this article, we try to analyse what has been driving the stock prices, apart from market sentiments.

One of the key drivers for the stock prices of Hindalco and Nalco has been the benchmark international aluminium prices, which has increased by about 12% in 2003 to date and much of the rise (7%) has come post-1H2003. As evident from the graph above, the share price movement of both Hindalco and Nalco reflect the rise in aluminium prices post 2003. Aluminium prices are currently ruling at their 2-year highs as also prices of other metals like copper (almost 3-year highs), lead (5 year-highs) and zinc (13-year highs).

Akin to the demand for all commodities, the demand for aluminium is also being driven by China. Currently, the country’s insatiable demand for metals, including aluminium, has been supporting the high prices in the international markets. The Chinese demand has been on the rise owing to huge infrastructure spending by its government. Moreover, with the Chinese economy continuing to power ahead with GDP growth rates in excess of 8%, the demand for consumer goods like white goods and cars have been on the rise.

Another reason for the rise in stock prices, especially Nalco, which has a larger alumina presence, has been the doubling of alumina prices in 2003 to about US$ 300 per tonne. China requires alumina in the region of about 9-10 MT, while its current alumina capacity of about 5 MT (the deficit met through imports). This has had a positive impact on prices.

However, the world’s larger economies, the US and the EU consume 60% of the world’s aluminium. Though there have been instances of upgrades in the recent past, sustainability is under cloud. While the airline industry has shown improvement in order book position, larger airline majors are focused on consolidation.

Aluminium prices continue to rule strong and indications of demand unlikely to subside considerably in the near future backed by strong support from China (second largest consumer of aluminium in the world). However, at current valuations, on price-to-earnings basis, aluminium stocks are on the higher side of the spectrum and much of the FY04 expectations have already been factored into the current stock price. At the same time, big-ticket consolidation in the industry of the likes of formation of Arcelor and now Alcoa’s bid for Pechiney all seem to signal good times ahead for the global aluminium industry.

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