What Do Falling Aluminium Prices Mean For Domestic Producers?

Prices of base metals—a class of non-precious metals used widely in industry like aluminium, tin and zinc—have declined between 5 percent and 15 percent so far this year, according to Bloomberg. But that may be only part of the problem.

The aluminium industry, which is currently facing a deficit, may swing to a surplus in the near future, led by slowing demand and increased supply, depressing prices further, Russia’s United Co. Rusal, the world’s second-largest producer of the metal, said in its commentary while announcing earnings for the quarter ended September.

The prices slump comes amid slowing growth in major global economies, including the U.S., China and the European Union, sparking fears of a recession. The International Monetary Fund said the world economy will expand 3.2 percent this fiscal, lower than its earlier forecast. India’s GDP growth dropped to a six-year low during April-June as consumers cut back spending on everything—from biscuits to automobiles.

“If U.S.-China trade tensions continue, then the global aluminium industry will face an uphill task to overcome new supplies coming up in China,” Rakesh Arora, managing director of Go India Advisors, told BloombergQuint. “The Indian aluminium industry will continue to feel global pressure and margin profile could further deteriorate especially for the integrated players.”

Agreed Sumangal Nevatia, senior analyst (basic materials) at Kotak Securities. Aluminium markets would return to a surplus in 2020 due to the strong supply pipeline in China as well as slowing demand, he wrote in a recent report.

Reasons Behind The Slowdown

Global automobile production fell 7 percent in the first six months of 2019-20 compared with 1.7 percent growth over last year, Rusal said in its post-earnings presentation. And Alcoa Corp., the biggest aluminium producer in the U.S., seemed to concur.

The company trimmed its global growth forecast for 2019 to 1.25-2.25 percent, down from 2-3 percent made in the previous quarter, while announcing its earnings for the quarter ended September. That, the company said, was driven by lower demand in China and the world following trade tensions and macroeconomic headwinds.

China And Oversupply Fears

Even as lower demand should result in production cuts to maintain pricing power, the industry is bracing itself for capacity addition of 4 million tonnes per annum this year due to easing industrial controls in China. Asia’s biggest economy imposed curbs on steel and aluminium producers in 2017, among other industries, as part of measures to clean the air in some of its smog-ridden cities and provinces.

Kotak Institutional Equities has cut its forecast for aluminium prices by 4-5 percent to $1,775 per tonne in FY21 as it foresees a surplus of 0.3 million tonnes by 2020 compared with a deficit of 0.4 million tonnes in 2019.

National Aluminium Company Ltd., too, expects the global market to face oversupply. The state-run aluminium producer and exporter said in its annual report for 2018-19 that the global aluminium market is expected to be “amply supplied” this year, and that most of the capacity addition (around 3 million tonnes) is expected to be in China.

Moderating prices of alumina—the key raw material for the industry comprising nearly a third of production costs—may also contribute to the supply glut.

Lower Alumina Prices

Prices of alumina have declined since June, falling around 20 percent since then. And that, in turn, has led to lower aluminium prices.

Prices started falling further after a Brazilian federal court lifted the final criminal embargo for Norsk Hydro ASA-owned Alunorte—the world’s largest refinery that produces alumina—in May after 19 months. The refinery was ordered to operate at half capacity since February 2018 when effluents allegedly mixed with water supplies to the region.

And buyers have been able to negotiate prices with producers. A Japanese buyer, Reuters reported in September citing an unnamed source, has agreed to pay a global producer a premium of $97 per tonne over the benchmark price for shipments for the fourth quarter of 2019—nearly 10 percent cheaper than the $108 paid in July-September.

Implications For Domestic Producers

Falling global prices of aluminium is likely to put pressure on profits of Indian producers as domestic prices of the metal are linked to the London Metal Exchange.

The threat of increased aluminium imports led by lower global prices persists, Nalco’s annual report stated. Imports comprised over half of India’s aluminium consumption in 2018-19. Thus, a variation in every percent in LME prices can affect the earnings per share of domestic producers.

Nalco is the most sensitive to changes in aluminium prices since it’s an integrated player that produces alumina, while Vedanta Ltd. would be least impacted because of the mix of various metals in its portfolio, according to Kotak Institutional Equities and Macquarie Research.