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Aluminium: In a lurch - Views on News from Equitymaster
 
 
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  • Nov 14, 2000

    Aluminium: In a lurch

    Why has Hindalco, India's largest private sector aluminum producer, witnessed a sharp sell off on the bourses? The reason is not far to seek. Aluminium prices on the LME have fallen by over US$ 140 in the last one month.

    However, in such a scenario, does one expect domestic aluminium companies, including Hindalco and National Aluminium, to take a big hit? The accompanying table makes the issue clearer.

    Margin of safety..
    LME Prices (US$/tonne) $ 1,450 $ 1,500 $ 1,550
    Premium (US$/ton) $ 75 $ 75 $ 75
    Clearing and other charges 2% 2% 2%
    Customs duty (incl surcharge and SAD) 33% 33% 33%
    Landed cost of imported metal (Rs) 95,912 99,057 102,201
    Landed cost of domestic metal (Rs) 86,869 86,869 86,869
    Excess of landed import cost of
    metal over domestic (Rs)
    9,043 12,188 15,332
    Source: Hindalco      

    As is evident from the table, at an international price of US$ 1,500 per ton, domestic prices are at a discount of over Rs 12,000 to the landed cost of imported metal. This serves as a margin of safety. Indeed, even if the prices were to fall to US$ 1,450 per ton, domestic prices would still be lower by over Rs 9,000. So, does that mean, we can ignore the recent 10% slide in international aluminium prices?

    No. Indian aluminium companies are expected to export 23% of their total output in this fiscal year, and therefore, lower international prices will have a direct bearing on their profitability. Also, declining international prices would prevent domestic producers from raising prices in view of the narrowing gap between international and domestic prices. If the gap were too close, the industry would then become exposed to the threat of large-scale imports.

    In such a scenario it is not surprising that Hindalco and National Aluminium have seen their stock prices retreat dramatically after aluminium prices peaked in March earlier this year. For the sentiment to turn buoyant again, international aluminium prices need to cover some lost ground.

     

     

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