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Aluminum prices unlikely to rebound amid slowdown
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Tuesday, 22 Nov 2011
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Aluminum prices on the London Metal Exchange have fallen 23% from their April 2011 peak to around USD 2,140 per tonne. The rally was triggered by the excess liquidity injected into the markets by the US Federal Reserve as part of its QE2 program in November 2011.

But as the program ended and concerns mounted about the rising debt in the euro zone the upward trend in prices was reversed. Fears about a global slowdown in demand prompted investors to dump commodities and aluminum was no exception.

Despite the sharp correction, there is little scope for a major rise given the uncertainty in markets across the globe. Unless the sovereign debt crisis in Europe is resolved and there are clear signs of economic stability in the region as well as in the US, aluminum is likely to stay in the USD 1,800 per tonne to USD 2,400 per tonne range over the next few quarters.

Demand for mill or a finished product are declining and is expected to remain low over the next two quarters as a result of weak consumer demand in Europe and the US. Demand for primary aluminum which is driven largely by China has also been on the decline in recent months. Global leader Alcoa has projected aluminum demand growth of 12% in 2011 against 13% in 2010.

Meanwhile, global inventories are up 12.7% this year. On a sequential basis, they were 4.7% higher at the end of the September quarter, hovering near their average of 2.6 million tonnes so far this year. At the same time, primary aluminum fell 7% and aluminum alloy 4% on the LME. The falling price of aluminum has severely impacted the profitability of aluminum producers during the July to September quarter.

While LME prices have fallen input costs like power and caustic soda have moved up thereby increasing the cost of production and squeezing operating profit margins. In fact, Moscow based Rusal stated that 10% to 15% of global output would be have to be stalled in the first half of 2012 if LME prices don't improve. Indian companies will also have to bear the brunt of such unfavorable business environment in the near term.

Operating profit margins at Hindalco, the country's largest producer of aluminum have been declining by about 1,000 basis points on average over the past four quarters. State run Nalco is worse off its operating profit margin fell from 24% last year to 10%.

Sterlite Industries reported a 5% decline in sales from its aluminum business for the September quarter. However, the company is relatively better placed than Hindalco and Nalco as only 10% of its revenue comes from its aluminum business.

Sectors that would stand to gain from lower aluminum prices include construction, packaging, consumer durables, electronics and automobile as input costs will be lower.

(Sourced from Economic Times)

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