The primary aluminum market is expected to remain in deficit for the remainder of 2021

The industry has reaped the benefits of high prices for metals and alumina as well as an impressive recovery in demand in markets outside of China.

By Kunal Bose

The revenues and profits of aluminum manufacturers here and also global industry leaders such as Alcoa in the United States and Norwegian Norsk Hydro for the quarter ended September 2021 were well above Street’s estimates.

The failure of the analysts is due to an insufficient appreciation of the strategic work of a number of constituents of the industry in terms of building efficiency in production centers, from the extraction of bauxite to the refining of the alumina through aluminum smelting which prepared them to effectively grasp the solid fundamentals of the post-Covid market.

The industry has reaped the benefits of high prices for metals and alumina as well as an impressive recovery in demand in markets outside of China. Strong global demand for base alumina for smelters is benefiting the government-owned National Aluminum Company (NALCO), which ends up with large export surpluses of the chemical after meeting its own requirements.

Aluminum companies outside China have benefited greatly from the energy crisis of by far the world’s largest producer of white metal which has forced Beijing to ration the electricity supply to aluminum smelters and other units. production of metals. The resulting Chinese production restriction has helped keep aluminum prices high.

An industry official said: “Market conditions until the third quarter remained very favorable for aluminum manufacturers. At the same time, they continued to face challenges mainly related to rising energy and raw material costs. For some items, prices have increased four to five times since the start of the year. Under these circumstances, the takeover feature is the continuous improvement in the operational efficiency of our three primary metal producers Hindalco, Vedanta and NALCO. This turned out to be a cost mitigating factor for them.

Hindalco, which wholly owns the world’s largest manufacturer of value-added aluminum products (VAAP) Novelis, found its third quarter EBITDA at a record 8,048 crore, up 56% year-on-year (YOY) . In its aluminum business here, too, EBITDA reached a record 3,247 crore or a margin of 42%, which Managing Director Satish Pai describes as “an almost world record in the industry… Our strategy of product-rich portfolio continues to deliver results. in various market scenarios. This encourages us to continue building a downstream asset base.

This focus on VAAP is adequately reflected in their sales (excluding wire rod), which grew by 36% to 86,000 tonnes, helped by a strong recovery in domestic demand. VAAP sales at the last quarterly count amounted to 25% of the total metal business. In fact, in the case of copper too, Hindalco is pursuing a strategy similar to aluminum. Pai says: “The recent acquisition of the Ryker copper rod unit is in line with our downstream development strategy.” Unlike primary metal, VAPs are significantly less subject to fluctuations in commodity prices and therefore margins are favorable.

NALCO’s performance in the first half of 2021-2022, in large part due to the achievements of the second quarter, has been unmistakably unmatched for more than a decade. Benefiting from high alumina and aluminum prices, the company reported a 783% growth in first-half net profit to 1,095 crore, with its share for the quarter ended September being 748 crore.

Steps taken by President Sridhar Patra to improve operational efficiency resulting in higher first half production of 3.649 million tonnes (mt) of bauxite, 1.051 mt of alumina and 228,000 tonnes of metal enabled NALCO to reap the benefits of soaring commodity prices. Alcoa says that in the second half of the year, the average alumina price rose to $ 312 per tonne, from $ 274 per tonne in the corresponding half of 2020-2021. The increase in the average price of aluminum over this period was much more pronounced, from $ 1,904 per tonne to $ 3,124 per tonne. Being one of the lowest cost alumina producers in the world and a major exporter of this chemical – last year’s exports were 1,185 mt – NALCO enjoys the status of the second largest source of foreign exchange among all public sector enterprises.

Like its two industry peers, the country’s largest aluminum producer, the Vedanta Group, produced the highest quarterly level of metal with 570,000 tonnes and also alumina with 511,000 tonnes. The group is present in several other raw materials activities. But its strong second quarter EBITDA of 40% margin was mainly supported by the general surge in commodity prices and improving aluminum production.

In the meantime, the world’s aluminum majors have all benefited from the rising prices of the global metal deficit and the impact of energy supply constraints on Chinese production. In fact, much to the delight of its shareholders, Alcoa’s adjusted EPS of $ 2.05 has beaten the street forecast by $ 1.66.

Hindalco said in a presentation that while world aluminum production from January to September was up 5% to 50.6 t of which China’s share was 29 t, consumption rose 12% to 51.5 t , with China alone claiming 30.1 t, resulting in a deficit of 0.9 t.

The period is marked by the continued improvement in demand for aluminum in markets outside China in key segments such as building and construction, food and beverage packaging, consumer durables and machinery. industrial. However, demand from the automotive sector has weakened due to chip shortages. As is often the case with commodities, aluminum prices have fallen several notches since reaching their highest level of over $ 3,000 per tonne earlier this year since July 2008. Margins have been squeezed lately. But aluminum makers shouldn’t complain that the three-month LME rate remains well above $ 2,600 per tonne. Most observers believe that with the reduction in global inventories and the decline in China’s average daily production each month since May, the primary aluminum market will remain in deficit for the remainder of 2021. But despite the power cuts. affecting foundries, Chinese production in the first ten months is up 6.5% to 32.37 mt. China should therefore end the year with record production.

(Former FT correspondent, author is now India correspondent for Euro Money, Metal Market Magazine)

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