Nalco waits for $100 fall to cut prices

KOLKATA: The price of aluminium on the London Metal Exchange (LME) tumbled to $1,948 per metric tonne, nearly a three-year low. The metal is down over 40% in the last four months, after peaking to $3,291 on July 11, 2008.

Domestic aluminium producers such as National Aluminium Company (Nalco) may have no alternative but go in for further price cuts if LME prices fall by another $100. Apart from falling prices, high raw material costs have squeezed margins of all major producers including Nalco, Balco and Hindalco.

But the upside is that all these companies, which have better control on stocks, have been able to absorb the price pressure till now. “This is a low price, but not as low as in 1993, when prices fell to $1,060. If they hold at present levels, we may not cut prices, but if they fall another $100, we may be forced to drop prices again,” a Nalco source said.

Nalco has gone in for cuts over the last three months as prices started sliding.
“Margins have been squeezed definitely following low prices on the one hand and input costs like coke, coal, fuel oil going up on the other. There has been a decline of almost Rs 40,000 per metric tonne since July,” the official said. Industry sources said if aluminium prices fall further due to a rise in inventories, imports could increase.

Though there are no spot import prices, imports to some extent do happen for blending purposes. Abhay Laijawala and Anuj Singla, analysts with Deutsche Bank, said though domestic players have already announced a spate of price cuts, another round of reduction is around the corner. “Continued weakness in LME has widened the spread between landed and domestic prices to Rs 12,000, underscoring the need for further domestic price cuts,” Laijawala and Singla said in a report on Thursday.

Nalco remains one of the lowest-cost producers of alumina in the world due to a combination of good quality bauxite, open-cast mines and use of a conveyor belt for bauxite transport, said Pradeep Mathani and Raashi Chopra of Citigroup. They said Hindalco unit Novelis sells 70% of its volumes in the US and Europe and could be adversely impacted by the demand slowdown there.

“Earnings of Novelis tend to benefit in a period of rising prices. Given the declining scenario that we expect, there is likely to be an adverse impact on Novelis earning,” Mathani and Chopra said in a report. Hindalco acquired Novelis, one of the world’s leading aluminium rolled-product companies, in May 2007. Industry sources said the first half of 2008 saw an upswing in aluminium prices mainly due to supply disruptions, which happened in China and South Africa.

It has reversed with demand-led problems of the general slowdown in the western world. Abhijeet Naik and Alok Rawat of CLSA Asia-Pacific Markets said there is now a rising probability that the global aluminium market could remain in the surplus over 2008-09.

“Key consumer industries such as auto and construction have slowed down in the US and Europe. Key economies in Europe like Germany, Spain and Italy are slowing down rapidly. Even in China, where aluminium consumption grew 39% in 2007, growth has slowed down to 11% year to date,” Naik and Rawat said in a note last week.
g_nandini@dnaindia.net