Saturday, July 14, 2012


In its Q2CY12 result commentary, Alcoa retained its global aluminium demand growth estimate for 2012 at 7% p.a. It also indicated deficit of 515kt for 2012, slightly higher from 435kt in the previous quarter led by ex‐China production cuts. The company believes current aluminium price is depressed compared with strong fundamentals, implicitly indicating that price is likely to have bottomed out and could move up in future.
Consequently, we expect short‐term pain for Indian aluminium producers, but also foresee improvement as prices rise eventually. Alcoa’s rolled products segment (comparable to Novelis) had stable QoQ EBITDA, in line with our expectation for Novelis of flat QoQ EBITDA for Q2CY12.

Aluminium price believed to be depressed
Alcoa indicated that aluminium price was depressed relative to fundamentals. The company cited growing demand, increase in physical market premium to record highs (up USD25‐50/t QoQ across regions) and decline in days of inventory (down three days QoQ) as a reflection of the strong fundamentals. Alcoa’s premium in the primary aluminium segment went up from USD 258/t in Q1CY12 to USD 352/t in Q2CY12.

Rolled products’ EBITDA stabilises QoQ
We expected significant QoQ dip in rolled products (FRP) EBITDA in Q2CY12, led by issues in Europe. However, it slid only 3.5% QoQ, at USD 193mn. Volumes were up 7% QoQ to 484kt (third‐party), but EBITDA/t declined to USD399 from USD447 QoQ. This seems fair w.r.t. Novelis since we are building in flat EBITDA QoQ at USD 234mn for Novelis.

Results below expectation by 9% at EBITDA
Alcoa’s reported revenue, EBITDA and PAT (ex one‐offs) of USD 5,963 mn (consensus estimate: USD 5,810 mn), USD 517 mn (consensus estimate: USD 567 mn) and USD 61 mn (consensus estimate: USD 81 mn), respectively. It indicated that pricing mix issues in rolled products had an adverse QoQ impact of USD 31mn.

Outlook: Aluminium prices likely to have bottomed
We see risk of aluminium prices remaining at current levels of USD1900‐2000/t for the next two quarters, despite sound fundamentals, which could lead to earnings cut for Indian aluminium producers (Hindalco, NALCO, Sterlite) for FY13. However, we believe prices will move up eventually and remain positive from a structural point of view. Increase in premiums and INR depreciation could also provide some relief. We expect the rolled product segment to post steady EBITDA in the short term for Novelis (in line with Alcoa’s Q2CY12 result trend) with some improvement in later part of FY13 and then FY14.

To read report in detail: ALCOA