Weakness led by demand uncertainty in Indian Aluminum sector: IIFL Capital Services

27 Jun 2023 , 11:16 AM

Continued weakness in LME Al prices to US$2,135/t is a manifestation of uncertainties on Chinese Real Estate recovery with limited govt support. 23 months of large double-digit decline highlights that on ground, demand uptick will only be gradual. Meanwhile, domestic Chinese supply continues to improve resulting in growing exports. This comes amid a weak outlook for global demand and improving smelter production in North America and Europe, as various key costs (gas, crude, caustic, and alumina) continue to fall. Analysts of IIFL Capital Services expect global aluminium surplus in 2023, which would likely increase in 2024 before normalising, as economic recovery takes hold gradually. This would keep LME Al prices range-bound. Analysts of IIFL Capital Services have baked in US$2,350-2,300/t in their FY24-25 estimates for Hindalco and Vedanta.

Demand uncertainty hurting LME Al prices: 

LME Al price continues to weaken, and at US$2135/t, is well below the average levels seen in 2021/22. Gains seen in early 2023 have all been lost amid sluggish recovery in Chinese Real Estate with weak new starts hurting under-construction work. Other indicators including Industrial output and PV sales are normalising as well. Meanwhile, ex-China demand outlook is weak, driven by slowdown in the western geographies.

Supply position improving in tandem: 

Supported by healthy production in China, Chinese net export of Aluminium jumped from 238kt in April’23 to 284kt in May’23 – well above the average monthly run rate of 250kt seen since 2020. Production from the North American and European smelters too has stabilised and improved as energy prices have normalised in a significant way. Over the medium term, supply can rise further as Chinese smelters maximise utilisation of capped 45mt capacity. Analysts of IIFL Capital Services see surplus over the medium term, albeit one which shrinks as demand recovers.