The year 2006 was a dream year for most commodities, also for aluminium when prices peaked at $3,275 a ton on the London Metal Exchange on May 11. Since then there has been considerable action that has seen metal prices draw down. Aluminium is now in the $2600 zone. This has been quite in line with other base metal prices like copper and zinc.
Lower prices have a telling effect on most aluminium companies in India, especially Hindalco and Nalco. One of the reasons for the Aditya Birla Group to aquire Novelis is the reduction in volatility of earnings that are commodity price driven.
For Hindalco, the acquisition process is said to reach its conclusion by mid 2007. However, even after that, for the acquisition to generate fully visible earnings and be reflected in Hindalco’s could take around three years. Till then, Hindalco’s earnings and share price will continue to be linked with LME prices.
And here things do not seem as optimistic as they were in 2006. Trade experts reckon that global supply growth is expected to grow by 6.5% versus demand growth at a slightly lower level of 5.6%. China is expected to be a major driver of growth in 2007 in both supply demand with 12% production growth and 14% demand growth. As regards the inventories, the aluminium market is expected to be relatively balanced, with a surplus or a deficit of around 200,000 tonnes. The year, could therefore see some softening in prices.
In the domestic market, however, significant spending in the construction sector, in automobiles and the packaging industry is expected to keep the buoyancy in the demand and local prices are expected to remain firm.
The global trend therefore has been, quite like the steel industry, to focus on creating primary smelting capacities in BRIC countries with plants located near bauxite mines or power generation facilities. The rolling of finished products is done near matured markets.
