Aluminium prices favour producers

Global aluminium producers have done well to curtail output and also successfully ward off the challenge posed by the proposed rule change for London Metal Exchange (LME)-linked warehouses. In the June quarter, aluminium prices on an average have risen 5.3% over the preceding quarter. And a Reuters report says the regional premium payable for metal deliveries to Japan for the July-September quarter has risen by 8-12% over the preceding quarter. All this should mean extra dollars for every tonne of metal produced by aluminium firms.

Regional premiums are payable by buyers for getting quicker deliveries of the metal. Earlier this year, there were fears metal supplies would increase after LME’s proposed rule change that would have forced warehouses to cut down on queues for metal supplies. But a successful legal challenge stopped that proposal in its tracks.

Still, the situation in 2014 looked rather difficult due to new aluminium supply coming in to the market, with doubts whether demand growth could absorb that increase. But the industry decided to shutter unviable capacity to improve profitability and, more importantly, to give support to prices.

Also, Chinese aluminium companies are not flooding the market as feared, according to a Rio Tinto Plc presentation, and it also expects the country to be self-sufficient over the medium term. Rio expects global inventory levels to come down due to demand growth exceeding output, and support LME prices. Also, a ban on bauxite exports from Indonesia has given a cost-push?to?aluminium ?prices, too.

The end-result is a happy one for Indian companies as their realizations should improve, too. Their shares have already run up along with the other cyclical stocks after the National Democratic Alliance government was elected to power. If their results do show the effects of better pricing, then it should lend support to their elevated valuations.