A worker pours molten aluminum into moulds at an aluminum smelter, operated by United Co. Rusal, in Krasnoyarsk, Russia. Photographer: Andrey Rudakov/Bloomberg

Here’s Why Aluminium Prices Are At 18-Month Low And What It Means For Producers

As aluminium prices touch an 18-month low, India is mulling a slew of measures, including imposing import duties and quotas, to benefit local manufacturers beset by higher manufacturing costs and rising imports.

Indian manufacturers urged the government to hike import duty on aluminium scrap and primary aluminium to 10 percent from 2.5 percent and 7.5 percent, respectively, the newswire PTI reported. Aluminium scrap imports, according to estimates cited by PTI, rose nearly 125 percent to 36,000 tonnes in the quarter ended June 2018 from 16,000 tonnes in the preceding quarter.

Geopolitical factors such as sluggish growth in China—the world’s largest consumer of aluminium—and the lifting of American sanctions on Russian producer Rusal, too, hit prices. The metal was caught in the crossfire of the U.S.-China trade war: the U.S. imposed 10 percent duty on certain aluminium products from China, with Asia’s largest economy responding in kind.

LME Aluminium Prices Affect Earnings

The financials of manufacturers are sensitive to fluctuations in prices of LME aluminium, Macquarie said in a report. A 1 percent change in aluminium prices, the brokerage said, would impact the earnings per share of National Aluminium Company Ltd., Hindalco and Vedanta Ltd. by nearly 3.8 percent, 2.1 percent and 1.3 percent, respectively.

The situation could be short-lived, according to Edelweiss. The brokerage said in a report that prices of the aluminium—which is one the least worst performer among base metals index could reverse due to significant cost pressure, an estimated deficit of 2 million tonnes in 2019, capacity closures in China and low inventory at the London Metal Exchange and Shanghai Futures Exchange.

Effect Of High Raw Material Costs

The rise in costs of raw materials, especially alumina, have led to suspension and relocation of operations, winter production cuts and flexible production schedules to meet reduced demand, according to metal bulletin release on Dec. 10. Prices of alumina, a key ore used in the manufacture of the metal, jumped 37 percent since June 2017. Coal prices have risen 4 percent during the same period.

But all may not have been lost, with prices of the metal expected to not decline. Morgan Stanley expects aluminium prices to stabilise at $2,150 a tonne this year compared with $2,147/tonne in 2018.

Has The Market Found A Bottom?

Inventories at the Shanghai Futures Exchange fell 39 percent from their peak in April last year. The Shanghai Futures Exchange Aluminium On Warrant Stock change index rose 26 percent in 2018.

Depleting inventory usually corresponds to an uptick in demand. The record low inventories at LME and SHFE are likely to support aluminium prices, according to an Edelweiss report.

A fall in export of Chinese alumina could help arrest aluminium price slide, since this would mean lesser amount of key raw material used to produce aluminium. Chinese alumina trades at a premium of 5-6 percent to generic alumina.