In its Q3CY12 result commentary, Alcoa has cut its global aluminium demand growth estimate for 2012 to 6% from 7% earlier. It also reduced its industry deficit estimate to 262kt for 2012 from 515kt due to low demand. Alcoa continues to believe that the current aluminium price is depressed compared to fundamentals thereby indicating a price recovery. The stable QoQ performance of its rolled products business is broadly in-line with our expectations for Novelis for Q2FY13.
Cuts aluminium demand estimate
Alcoa cut its global aluminium demand growth estimate for 2012 from 7% to 6% at 46.1mt, mostly led by a weak Chinese demand. While it has cut China aluminium demand growth estimate for 2012 from 11% to 9%, it is hopeful of a recovery in Q4CY12, led by the announced stimulus. It continues to believe that aluminium prices are depressed relative to fundamentals. The company cited growing demand, increase in physical market premium to record highs (up USD25-50/t QoQ across regions and USD 75-125/t on YoY basis) and a decline in days of inventory (down 27days from peak in 2009, flat QoQ) as a reflection of the strong fundamentals.
EBITDA of rolled products up marginally QoQ
EBITDA of Alcoa’s flat rolled products (FRP) was marginally up from USD193mn in Q2CY12 to USD198mn in Q3CY12 while EBITDA/t was up from USD399 to USD410. Volumes were stable QoQ at 483kt. We are building in a modest QoQ increase in EBITDA for Novelis from USD259mn in Q2CY12 to USD265mn in Q3CY12.
Results above expectations
Alcoa reported revenue, EBITDA (adjusted to one-offs) and PAT (adjusted to one-offs) of USD5,833mn (consensus estimate: USD5, 562mn), USD496mn (consensus estimate: USD436mn) and USD32mn (consensus estimate: loss of USD19mn) respectively. COGS increased QoQ by USD112mn due to weaker LME. We believe that the hike COGS includes part of the one-off costs and higher energy costs. All this was partly offset by productivity gains of USD55mn and improved product mix increase of USD34mn QoQ.
Outlook: Aluminium prices likely to have bottomed
We may see a hike in Indian aluminium premiums based on an increase in NALCO tender premiums which will benefit Indian operations of all aluminum companies. However, reliable industry-level time series data is not available for India. We also believe aluminium prices are depressed when compared to fundamentals. In September 2012, LME prices have jumped from ~USD1,800/t to range between USD2,000-2,100/t at present. Our FY14 estimate is USD2,100/t but we see some upside risks to the same.
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