Aluminium: Not much reason to cheer

The BSE metals index has rallied smartly over the last two weeks to gain over 26 per cent, outperforming the Sensex which has seen a rise of 18.5 per cent.

Sterlite gained a huge 40 per cent with Hindalco too posting returns of 32 per cent. Nalco though didn’t fare quite as well, the stock rose just over 13 per cent. The immediate reason for the rally: a firming up of aluminium prices on the LME from levels of $1,302 levels to $1,440 levels, a gain of over 10 per cent. Copper prices too have hardened by about 12 per cent to touch $4,006 per tonne (source: LME, Bloomberg).

Will prices hold up? Unlikely say analysts, not unless automobile, construction and infrastructure companies start buying soon. The recent price rise has been attributed to inventories being maintained at a certain level and to some buying in the spot market where prices were lower. Demand, they say, remains weak, which is why CLSA has trimmed its forecasts for aluminium and copper prices in 2009-10. Earlier, it had pegged aluminium prices at around $1,950 per tonne for 2009-10 but has now lowered them to $1,500-1,600 per tonne.

At these levels, profits for aluminium companies will be hard to come by. And should copper prices rule at $ 3,500-$3,700 levels, Sterlite could see profits come off quite sharply next year.The Street already has some reservations about the Asarco deal partly because Ascarco’s manufacturing costs are on the higher side. With the outlook for aluminium prices uncertain, analysts believe Nalco’s numbers next year could be rather weak although it would benefit from lower prices of imported coal. With Novelis reporting a 15 per cent fall in volumes in the December 2008 quarter, parent Hindalco too could see its profits dented.