Aluminium manufacturers brace for uncertainty as global majors cut supplies amid escalating fuel cost

Jindal Steel & Power

Aluminium manufacturers in India may be staring at uncertain times going ahead as global prices continue to soften even as global manufacturers cut supplies amid escalating costs.

State-run National Aluminium Company (NALCO) reported a sequential decline in topline and operational performance in the first quarter of 2022-23 after the market hours on August 8. While typically June quarter is weak for the sector, there are signs that the global weakness is weighing on the country’s aluminium manufacturers.

The outlook of the aluminium players looks way grimmer given the global trend and local players being highly sensitive to the London Metal Exchange (LME) prices are not expected to be unscathed.

A report from Morgan Stanley on the industry early in July suggested that eroding margins of aluminium players due to falling commodity prices and rising smelter cost curve raise the risk of further capacity curtailment across the industry- a trend which is catching up with speed.

The first telltale sign came from the largest aluminium producer in the United States, Alcoa Corporation, which not only failed to put a growth number on demand estimates for the ongoing calendar year 2022 but also cited near-term uncertainties while reporting its second-quarter earnings.

Back home, jitters were first sensed across the street after ace investor Rakesh Jhunjhunwala trimmed his stake to below one percent in NALCO  as per the latest June quarter holding disclosed by the company on the Bombay Stock Exchange (BSE). After holding the stock for nearly three quarters, Jhunjhunwala’s name no longer appeared in the individual shareholder list of the company, making it unclear if he completely sold off his holding on the counter or still holds a stake of less than a percent. The market saw this as a sign that he was no more bullish on the stock.

How Did NALCO’s Earnings Fare?

NALCO reported 53 percent growth in its net sales on a year-on-year basis. But sequentially, the company reported a 13 percent decline in net sales of Rs 3,800 crore, tracking LME aluminium and alumina prices which fell 12 percent sequentially. The company’s operational performance was hit by the correction in LME prices and rising input costs. The sequential cost escalation was nearly 51 percent due to higher power and fuel cost which weighed on the financials of the company.

Post earnings, brokerage firm Phillip Capital reduced its target price on the counter to Rs 90 from Rs 120 to factor in lower LME price, the forecast of which has reduced from
$2,800/2,450/ tonne for FY23/FY24 to $ 2,450/2,250/ tonne, and higher costs.

According to the brokerage, LME aluminium prices have fallen nearly 39 percent from their peak levels achieved in March following inflationary and recession fear.  Continuation of higher levels of exports from China aided by unabated production also has been putting pressure on prices, essentially eroding the deficit forecast.

Cautious Signals from Alcoa Corporation

In its June quarter’s presentation to investors, the largest aluminium producer Alcoa pointed toward uncertainties including the impact of China’s stimulus programme, disruption in exports from Russia, near-term economic growth concerns, and the threat of further curtailment in production given high global energy prices.

But, the curtailment just wasn’t announced by one company. A string of other players also announced production curtailment, partially due to exorbitant energy prices which lead to losses for the mills.

Production Cuts Across the World

The steep rise in global gas prices has forced global aluminium makers, especially in Europe, to temporarily shut units or reduce output as production is not sustainable at high input cost. This comes at a time when aluminium prices have been sliding despite inventories being at an all-time low level.​

Romanian aluminium company Alro with an alumina refining capacity of 600kt will shut down its refinery for 17 months. The world’s second-largest aluminium company RUSAL has already shut its Nikolaev refinery (capacity 1.7mt) in March 2022. Furthermore, Norwegian aluminium producer Norsk Hydro has announced curtailment of its European smelter and refinery. Recently, Alcoa Corporation in early July announced that it will begin the process to immediately curtail one of three operating smelting lines at its Warrick operations facility in Indiana due to operational challenges. Before this, the company safely curtailed its Spain aluminium smelting capacity.

Road ahead

Analysts and industry players expect that there may be more supply cut announcements in the industry. In a report dated August 9, brokerage Motilal Oswal said that it expects a spate of announcements regarding a reduction in utilisation by aluminum smelters and refineries due to spiralling costs in Europe and declining power availability ahead of the winter season and improvement in aluminum production in China from the second half of the financial year.