Visit http://indiaer.blogspot.com/ for complete details �� ��
n Expect pullback in prices in near term; then a rally to USD 2,550/t
Aluminium prices have increased sharply from USD 1,920/t in July 2010 to ~USD 2,350/t currently. We expect a slight pullback in prices in Q4CY10 and then a rally to USD 2,550/t in FY12. We assign 25% chances of prices reaching USD 2,900/t.
Our estimates indicate that the global aluminium market had deficit of ~3 mtpa and 0.4 mtpa (annualized) in June and July, respectively. After a small surplus in August, we have seen a deficit re-emerge in September. Demand growth was led by the developed world, especially Europe. Sectoral leadership is currently with auto and consumer durables. Construction is weak, but we expect it to pick up in CY11.
n Markets not factoring in supply side issues
In the US (traditionally the largest supplier of aluminium scrap to China), scrap supply has touched a 10-year low. As China’s scrap imports continue to rise (touching 2.9 mtpa in CY10), the scrap market is experiencing unprecedented tightness. Further, of the 3 mtpa of aluminium production cuts taken in the developed world as part of the crisis, only 25% has restarted, led by low margins and financial distress.
n Consensus incorrect in considering China as surplus in aluminium
In CY08 and CY09 China imported 2.1 mt and 2.6 mt of scrap aluminium, respectively. Factoring scrap imports, it has been running a deficit of ~5 mtpa despite the restart of 3.6 mtpa primary aluminium capacity. In any case, with 15% export tax on primary aluminium and LME prices lower than Chinese (SHFE) prices, the risk of Chinese primary aluminium exports is low.
n Chinese imports of primary aluminium likely to rise strongly in future
China is in the process of cutting capacity of ~2.0 mtpa, led by outdated technology, need to conserve energy and unremunerative prices. Chinese primary aluminium production is down ~8% from its June 2010 peak (1.5mt annualized). We estimate, in CY12, China could import ~1 mtpa of primary aluminium as supply lags demand.
n Outlook: Prices to rally; Buying opportunity now
Factors such as tightness in the scrap market, patchy but increasing demand trend and inadequate supply response will lead to higher aluminium prices, going forward. We raise our aluminium price estimates for FY11 from USD 2,170/t to USD 2,225/t and for FY12 from USD 2,400/t to USD 2,550/t. We continue to prefer Hindalco as our non-ferrous top pick and maintain ‘BUY/SO’ on it; we raise its FY12 EBITDA by 12% and fair valuation to INR 291/share from INR 210/share (upside of 38%). We retain our ‘BUY/SP’ on Sterlite with fair valuation of INR 205/share. We see immense value in the business in spite of issues related to its aluminium and copper expansion. We retain ‘REDUCE/SU’ on NALCO with fair valuation of INR 341/share.
No comments:
Post a Comment