Weak forecast for aluminium prices to affect domestic producers next year

Aluminium prices are expected to soften by 1.7% in 2020 after an expected decline of 15.1% in calendar 2019

A bearish forecast for aluminium prices in calendar 2020 is likely to rattle domestic producers. Fragile prices on the London Metal Exchange (LME) during 2019 have already disconcerted primary producers like state-run National Aluminium Company (Nalco), Hindalco Industries and Vedanta Ltd.

A World Bank Commodities report says aluminium prices have dropped by 1.7 per cent during July-September 2019, marking the fifth consecutive quarterly decline.

“Concerns about raw material (alumina) supplies have eased as the world’s largest alumina refinery, Alunorte in Brazil, resumed operations in May after a 14-month court-ordered stoppage. The impact from China’s red mud spill in May in the key production base of Shanxi Province has also receded. In addition, weak global car demand has weighed on aluminium prices’, the report noted.

However, China’s aluminium production and smelter capacity has expanded as environmental curbs turned out to be less stringent than anticipated. Hence, aluminium prices are expected to soften by 1.7 per cent in 2020 after an expected decline of 15.1 per cent in calendar 2019, reflecting lower alumina prices and large overcapacity in China.

Globally, spot alumina prices have halved to the level of around $300 per tonne from $600 a year ago. While weak alumina prices have profited Vedanta, a key importer, they have nibbled at the margins of Nalco, which exports over one million tonnes of surplus alumina in each fiscal year.

However, subdued aluminium prices on LME have impacted all the three primary producers. LME aluminium prices stood at $1746 per tonne for the cash buyer (as on October 30), less than the cost of production for the primary aluminium manufacturers. At this price point, 10 per cent of the aluminium smelters worldwide are incurring cash losses.

“Globally, the escalating US-China trade tensions have dampened the economic environment and moderated aluminium consumption and prices. And, given the subdued domestic macroeconomic growth environment and weak sentiment, we have observed moderation in demand in user industries like automotive, construction and electrical sectors. The slowdown in these sectors could be attributed to tight liquidity conditions”, said an industry source.

By the end of June 2019, international aluminium prices had fallen 21 per cent year-on-year (y-o-y) to an average of $1793 per tonne.

Lacklustre aluminium prices had a bearing on the financials of the aluminium producers. Hindalco's aluminium business including operations of Utkal, recorded 41 per cent slump in its earnings before interest, taxes, depreciation and amortization (Ebitda) to Rs 899 crore due to lower realizations. Nalco's net profit tanked 85.76 per cent to Rs 97.78 crore.