Fall in aluminium stocks an opportunity to buy?

ET Intelligence Group: After imposing sanctions on the Russian aluminium producer Rusal less than two weeks ago, the Trump administrator has said it may consider lifting them. Aluminium price on the LME, which had surged by over 20 per cent after the sanctions were announced, crashed 7 per cent on Tuesday.

Shares of Indian aluminium companies like Hindalco, Nalco and Vedanta mirrored the fall in aluminium price. However, while they may show weakness for a few more trading sessions, long-term investors may find them attractive given better future prospects for the sector.

A sharp surge in aluminium price soon after the sanctions earlier reflected the supply constraints in the global market due to years of under-investment despite 5 per cent increase in the demand. The capacity additions in the coming years are likely to be limited given the US ongoing trade war with Russia and China.

Industry trackers expect Rusal, the largest aluminium producer outside China, to curtail expansion. At the same time, demand is likely to grow.

The US and Europe are expected to be the largest aluminium deficit regions with deficits of 4.8 million tonnes and 3.7 million tonnes, respectively. This would be beneficial for the domestic producers in the long-term. There are only a handful of major aluminium expansion projects lined up for the next three-four years; one is by Rusal and two by Indian companies Hindalco and Vedanta. China too is going slow on capacity additions due to environmental issues.

Domestic producers may gain further if the rupee continues its slide. The cost of domestic aluminium production is in Indian rupees given Hindalco and Nalco are fully backward integrated, that is they have bauxite mines. A slide in the rupee will not only make Indian producers more competitive but also help them increase the domestic market share. The share of imported aluminium in Indias total consumption is around 40 per cent. A weak rupee may make the Indian market less lucrative for Chinese and Russian aluminium producers.

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