Edelweiss prefers Hindalco among non-ferrous players, stock shines 2%

Edelweiss expects alumina price to stay near the current level of $400 per tonne till Alunorte resumes operations.

Hindalco Industries shares gained 2.4 percent intraday Thursday after Edelweiss Securities said it continued to prefer the stock among non-ferrous players in view of expected volatility in LME aluminium and alumina prices.

Despite LME aluminium prices slipping below $1,900 per tonne, the research house sees good support from sustained cost pressure and low inventories. While there are risks on growth and trade tensions, it perceives a possibility of aluminium reversing its course.

LME aluminium slipped below $1,900 per tonne for the first time in the past 16 months, trading closest (compared to other base metals) to the marginal cost of production.

Average global cost of production is still at $1,800 per tonne led by alumina and thermal coal cost. In August 2017 when LME aluminium was at similar level, alumina cost was 25 percent lower compared to the current level.

Edelweiss expects alumina price to stay near the current level of $400 per tonne till Alunorte resumes operations.

China became net alumina exporter for the first time in CY18; however, the research believes this is unsustainable as global prices are again at a discount to China's domestic prices.

Record low LME and SHFE inventory is likely to support aluminium prices further, according to the research house.

In China, players dependent on domestic alumina and grid power posted losses for the fourth consecutive month. Current level of SHFE aluminium is the highest in past seven years at which players are clocking loss at the EBITDA level owing to cost pressure.

Edelweiss believes this will spur capacity cuts.

The research house said CY19 aluminium demand growth is pegged at 2.5-3.5 percent YoY. "However, weak Chinese demand in second half of 2018 and further uncertainties expected in CY19 remain a cause of concern."

Driven by expected deficit of around 2 million tonne (around 3 percent of overall demand), Edelweiss sees limited downside for LME aluminium prices. "If costs dip post Alunorte resuming full production and/or thermal coal prices receding, LME aluminium prices could come under pressure."

At 12:45 hours IST, the stock was quoting at Rs 221.60, up Rs 3.25, or 1.49 percent on the BSE.

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