IIFL expects aluminum prices to rise in FY2013

 

 

Low economic incentives to purchase aluminum led to subdued aluminum imports from ex China, as consumers were focused on destocking. In addition to this, the gradual increases of aluminum production which hit a record 45 million tonnes annualized in August, dampened sentiments.

 

 

However, the fall in aluminum has been lower than other base metals during the year. The strong rise in input costs has largely contributed to the metal outperformance in 2011. The decline in costs of raw material used in aluminum manufacturing has been much lower than the decline in aluminum prices. Input costs have continued to rise in 2011, led by shortages in bauxite, alumina and coal, especially in China where 45% of smelting capacity is in the top quartile of the global cost curve and 20% use outdated technology. We estimate average global aluminum costs at USD 2,000 per tonne. With LME prices near USD 2,000 per tonne we see half of the industry in red and this would lead to production cuts going ahead.

 

 

We believe closures do not take place overnight or even within a few weeks of a price tumble. Since it is expensive to close down plants, producers do not want to take such steps until they are sure weak prices will persist for a long time. It costs a lot of money to put plants on care and maintenance. Ultimately, cuts in production should help the market find a bottom since this means less supply. We expect prices would find a floor if prices stay lower for a longer period and producers would find it difficult to sustain. With marginal cost being above current prices and demand remaining steady, we expect aluminum prices to rise in FY13 from the current level. We revise our aluminum prices estimates for FY2012 to USD 2,310 per tonne and USD 2,250 per tonne for FY2013.

 

 

The impact of lower commodity prices on profitability of domestic metal producers would be cushioned by the sharp depreciation in the rupee against the dollar. Indian metal producers will be at an advantage, in our view, given that most of the other major currencies have remained largely flat, while the rupee has depreciated by 16% during the past 3 months. So while producers in other countries have seen 10% to 15% falls in revenues, domestic producers would see just 1% to 3% fall. On account of the sharp decline in the rupee against the dollar we revise our rupee estimate to 48 in FY2012 and 50 in FY2013.