As aluminium prices fall, fate of local companies hinges on tariff buffer
- A likely increase in import duties may offer some support, but the outlook will continue to remain weak.
- The steep fall in aluminium prices shows the weakness in demand.
- From the peak in April, aluminium prices have fallen 28 per cent.
Commodity Summary MCX
Current LME aluminium prices are at $1,850 per tonne, much lower than what analysts had estimated. Earnings estimates were largely made with $1,940 a tonne as the price benchmark. The recent fall in metal prices could lead to a sharp earnings downgrade unless there is an increase in import duty.
Union minister Suresh Prabhu recently said that there is a proposal from the industry to raise the duty on imports and the commerce ministry is in favour of it. Around 1.4 million tonnes (MT) of aluminium, or 40 per cent of total domestic demand, was imported in 2017.
The local aluminium industry, which has been seeking protection against rising imports, has proposed an increase in levies on scrap and primary aluminium from 2.5 per cent and 7.5 per cent, respectively, to 10 per cent.
A likely increase in import duties may offer some support, but the outlook will continue to remain weak, given the falling aluminium prices globally. The steep fall in aluminium prices shows the weakness in demand, especially from the slowing global automotive sales. From the peak in April, aluminium prices have fallen 28 per cent.
Average global cost of aluminium production is estimated around $1,750 to $1,800 per tonne, given the elevated alumina and coal costs. Indian players such as Hindalco and Nalco are fully backward integrated and hence may not get into losses if aluminium has to fall further.
Vedanta, not being fully integrated, will be more affected. For Vedanta, in the latest quarter, aluminium contributed 17 per cent to total earnings, and zinc 50 per cent, while oil largely made up the rest. The decline in oil prices would also affect the total earnings.
At average LME aluminium price of $2,087 a tonne in the September quarter, Vedanta’s operating margin was 10 per cent, Hindalco’s 19 per cent and Nalco’s 27 per cent. Nalco, a net alumina long player, benefitted from higher alumina prices. Despite the sharp correction in the commodity prices, shares of these companies have largely remained firm.