26 Aug , 2022 By : Kanchan Joshi
Aluminium prices on the London Metal Exchange (LME) are now in the range of $2,350-2,450 per tonne, after plummeting from the high of $3,877.50 in March amid muted global demand.
A series of lockdowns in China have weighed heavily on demand more than supply as the country is a key consumer of metals. Analysts at Kotak Institutional Equities said that demand in China contracted by 5.9% year-on-year in Q2 of 2022 against a production growth of 3.9% year-on-year.
Heatwaves in various provinces of China have also impacted demand amid power shortages. This has been an obstruction for production as this is an energy intensive metal.
The country is introducing a slew of measures to revive the economy but such monetary and fiscal stimulus would take time to bear fruits. “CRU expects demand to contract by 1% versus supply growth of 6.2% in Q3CY22. We expect demand to recover in Q4CY22 due to stronger seasonal restocking, pent-up demand on a low base and materialization of stimulus measures," added the Kotak report.
However, demand in ex-China regions is likely to remain weak. Kotak analysts have reduced ex-China demand forecast by 1.3%/0.8% for CY22/23E and now estimate only a 1.7%/2.2% year-on-year growth. Further, given the low spot metal prices, many smelters in Europe are running at cash losses. The only saving grace are the existing gas price hedges. As such, entities have announced smelter curtailments.
Indian aluminium producers such as Hindalco Industries Ltd and National Aluminium Company Ltd (NACL) continue to be plagued by higher coal costs and lower aluminium prices, which means a drop in margin in Q2FY23. From their 52-week highs, shares of Hindalco and NACL are down as much as 30% and 38.5%, respectively.
Analysts at Kotak forecast LME aluminum prices of $2,650/2,600 per tonne in FY2023/24E. This compares to the price of $2,444 per tonne as on 25 August. “We expect the domestic coal availability to improve in H2FY23E and easing costs with stable to higher metal prices to aid margin expansion," added the broking firm.
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