It may take a while for aluminum companies to get back in shape

A series of lockdowns in China has weighed heavily on demand more than supply as the country is a major consumer of the metals. Analysts at Kotak Institutional Equities said demand in China contracted 5.9% year-on-year in the second quarter of 2022 against production growth of 3.9% year-on-year.

Amidst the shortage of electricity, the effect of heat in various provinces of China has also affected the demand. It has been a barrier to production because it is an energy intensive metal.

The country is initiating several measures to revive the economy, but such monetary and fiscal stimulus will take time to bear fruit. “CRU expects supply growth of 6.2 in Q3CY22 versus demand to contract by 1%. We expect demand recovery in Q4CY22 due to strong seasonal restocking, reduction in demand on a lower basis and implementation of stimulus measures,” Kotak added in the report.

However, demand is likely to remain weak in the East China regions. Analysts at Kotak cut ex-China demand forecast for CY22/23E by 1.3%/0.8% and now forecast only 1.7%/2.2% year-over-year growth. Also, given the low spot prices of the metal, many smelters in Europe are running cash losses. The only saving grace are the current gas price hedges. As such, entities have announced smelter cuts.

Indian aluminum producers like Hindalco Industries Ltd and National Aluminum Company Ltd (NACL) are facing higher cost of coal and lower aluminum prices, which means margins declined in Q2 of FY23. Shares of Hindalco and NACL are down as much as 30% and 38.5%, respectively, from their 52-week highs.

Kotak analysts have forecast LME aluminum prices at $2,650/2,600 per tonne for FY2023/24E. This compares to the price on August 25 at $2,444 a tonne. “We expect domestic coal availability to improve in H2FY23E and cost reduction with stable to higher metal prices to aid margin expansion,” the broking firm said.

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