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Base metal prices at a crossroads; analysts prefer Hindalco

The trade-related tension between the world's two biggest economies has already seen across-the-board selling in metal space.

Swati Verma  |  New Delhi 

aluminium

Base metals prices are at a crossroads. All eyes, analysts say, are now set on the outcome of the upcoming G20 summit that will have a bearing on how metal prices play out going ahead. A failure to reach an agreement could see import duties on Chinese goods raised to 25 per cent from the current 10 per cent, which analysts say will be damaging for the world economy.

The trade-related tension between the world’s two biggest economies has already seen across-the-board selling in metal space. Base metal prices, including copper, have corrected 18 – 20 per cent on an average since June 2018.

Some analysts, however, believe that the sharp fall over the past few months is already factoring in the worst. The other factors that bolster their positive views on the non-ferrous metals pack include low inventories and likely correction in the dollar index (dollar index is inversely correlated to base metal prices).

“We have seen huge rally in the dollar index this year. From 88-89 levels, it has moved up to 98. It is now likely to consolidate and/or correct going forward. This will be good for base metal prices. That apart, we do not see trade war fear continuing to linger on for long from here on. There has to be some dialogue and we are very hopeful that there could be an amicable solution to this the issues at the G20 meeting,” says Navneet Damani, commodity analyst at Motilal Oswal Financial Services.

ADVANTAGE ALUMINIUM

On the domestic front, analysts are extremely bullish on aluminium owing to cost benefits and demand-supply balance. Analysts expect the global demand for aluminium to rise 4 per cent to 64 million tonnes (MT), while the production growth is pegged at 1 per cent at 62.2 million. This will leave a global deficit of 1.8 million tonnes.

“There is a significant amount of cost support in aluminium and a decent pace of growth is seen in demand for the metal,” says an analyst tracking the sector at ICICI Securities. Zinc is second on the list, as a lot of supplies are in the offing and new projects have also been announced. But, demand supply doesn't look as favourable as for aluminium, the analyst added.

Analysts at Centrum expect the deficit in zinc supply to narrow to 330 kt (kilo tonnes) in CY18E, which would further reduce sharply to nearly 80 kt going ahead, experts say.

On supply side, zinc production has already started at capacities added by New Century Resources (264ktpa) in Australia and Coeur Mining’s Silvertip project in Canada. That apart, Vedanta’s Gamsberg mine in South Africa is expected to start producing soon. Glencore is expected to add supply in CY19 along with expansion of Hindustan Zinc’s Sindesar Khurd and Zawar mines.

INVESTMENT OPTIONS

Analysts remain bullish on the road ahead for Hindalco and Vedanta. Even though Nalco is in the aluminium business, analysts say the company may not be fundamentally strong enough to withstand the headwinds.

As regards Hindalco, nearly 55 per cent of operating profit is derived from its converter business of Novelis, fetching better realisations and margins. This, going ahead, will keep the company insulated from adverse business conditions, says a note from ICICI Securities.

“Furthermore, access to captive alumina through Utkal Alumina facility shields the domestic aluminium operations from cost inflation. Going forward, we believe the recent acquisition of Aleris will strengthen the downstream operations and de-link Hindalco’s business model from being largely commodity driven,” the brokerage added. It has ‘buy’ rating on the stock with the target price of Rs 275.

A K Prabhakar agrees and suggests that the company will benefit in the medium-to-long term given the diverse business segments. “Hindalco’s product and product pipeline is very good and they cater to a niche industry as well. This should keep the company insulated from adversities, says A K Prabhakar, head of research at IDBI Capital Markets.

For financial year 2018 – 2019 (FY19) and FY20, analysts at Motilal Oswal peg the net sales growth for Hindalco at 13.6 per cent and 17.5 per cent respectively, while operating profit margin is likely to rise 12.4 per cent each year. Return on equity (RoE) is likely to come in at 14.9 per cent for FY19 (12.8 per cent in FY18) and 13.7 per cent for FY20, respectively.

First Published: Mon, November 26 2018. 12:04 IST
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