Shares of National Aluminium Company Ltd (NALCO) and Hindalco Industries surged on Wednesday, August 12, after a production cut at a major alumina refinery in Brazil raised concerns over global supply and pushed aluminium prices to a seven-week high. NALCO shares jumped 7.84 percent to Rs 418.3 in morning trade, making the stock the top gainer on the Nifty Midcap 100. Hindalco Industries rose 3.49 percent to Rs 1,085.75 and was the top gainer on the Nifty 50.

The rally in Indian aluminium producers came after Norway-based Norsk Hydro said its Alunorte alumina refinery in Brazil had temporarily reduced production to 50 percent of capacity because of lower availability of natural gas. Alunorte in Brazil has an annual alumina production capacity of 6.3 million tonnes and is one of the world's largest alumina refineries. Alumina is the key raw material used to manufacture primary aluminium.

Hydro said it took contingency measures after being informed about disruptions in gas availability, including procuring gas from other sources, while temporarily cutting alumina production to half of capacity. The company expects to begin ramping Alunorte back towards full production once gas availability normalises.

The disruption has added to concerns over raw-material availability in the global aluminium market. Three-month aluminium on the London Metal Exchange rose as much as 2 percent on Tuesday to $3,382.50 a tonne, its highest level since June 22. Aluminium prices had already been supported by declining inventories and supply disruptions from the Middle East.

Why are NALCO and Hindalco stocks rising?

A prolonged reduction in output at Alunorte could tighten alumina availability outside China. Firmer alumina prices can raise production costs for aluminium smelters that depend on externally purchased raw material, while tighter supply across the value chain can support aluminium prices.

Integrated Indian producers such as NALCO and Hindalco are relatively well placed in such a scenario because both have their own bauxite mining and alumina-refining operations, reducing their dependence on externally sourced alumina.

NALCO potentially has exposure to both sides of the price move. The PSU operates across the aluminium value chain, from captive bauxite mining and alumina refining to aluminium smelting. Its Damanjodi refinery has capacity of 2.1 million tonnes per annum, with alumina first used to meet the company's own aluminium-production requirements and the surplus sold to third parties in export markets. Its Angul aluminium smelter has annual capacity of 4.6 lakh tonnes.

Thus, stronger alumina prices could improve realisations on NALCO's surplus alumina sales, while higher aluminium prices can support realisations from its primary metal business.

Hindalco is similarly integrated across the upstream aluminium chain in India. It mines bauxite and processes it into alumina at its refineries, with the alumina primarily used internally for aluminium production. The company's Indian aluminium smelters have combined annual primary-metal capacity of around 1.3 million tonnes.

Higher aluminium prices therefore provide a potential realisation and margin tailwind for Hindalco's upstream aluminium operations, while its captive and  integrated raw-material base limits its exposure to a rise in spot alumina prices.