Here’s why Kotak Institutional Equities is cautious on aluminium plays

Weak demand, waning cost advantage and growing price pressure has turned Kotak Institutional Equities cautious on aluminium stocks.

Aluminium prices have remained subdued and will remain under pressure, the brokerage firm said, adding the demand for the industrial metal will remain sluggish even as cost support fades.

The domestic brokerage firm has a “sell” call on Vedanta and National Aluminium Company (NALCO) with the fair value unchanged at Rs 240 and Rs 70, respectively.

“Falling international thermal coal prices are an added negative for Indian aluminium producers, as their relative cost advantage over global peers narrows down,” the brokerage said.

Read more | Vedanta rises 2% after parent receives royalty payment from Hindustan Zinc

Narrowing cost advantage

The brokerage firm said Indian aluminium producers enjoy a cost advantage due to cheap domestic coal compared with global peers that use Australian or South African thermal coal or natural gas.

The cost advantage expanded during FY22-23, as domestic prices underperformed the rising international prices. Kotak Institutional Equities sees a reversal of this benefit, as international prices have corrected sharply in the past six months.

Catch up on all LIVE stock market updates here

Falling thermal coal prices

Thermal coal prices corrected by another 25 percent in the past two months and now RB1, at $100 per ton, is at a two-year low, the domestic brokerage firm pointed out.

RB1 is a standard specification of thermal coal based on calorific value, total moisture, volatile matter, ash, sulphur and other such parameters.

Coal–used in production of aluminium–forms a chunk of the overall production cost.

Declining costs have led to a rise in aluminium spreads to $1,100 per ton, 40 percent or $300 per ton above the five-year average of approximately $800 a ton, Kotak Institutional Equities said.

A significant expansion in spreads amid a bleak demand environment suggests prices will remain under pressure, it added.

Read more | Tata Steel: India remains ‘bright spot’ amidst sustained inflation, declining exports

Sluggish demand

Aluminium prices have corrected 4 percent in the past two months, with the LME now trading in a narrow range of $2,175-2,275 per ton, the brokerage firm said.

Demand hasn’t recovered, as was expected, in the second quarter of 2023. The April-May data suggests a year-on-year (YoY) decline of around 5 percent in world ex-China demand in the second quarter of 2023, offsetting a 5 percent YoY growth in China, said Kotak Institutional Equities.

The the latest macro data from China suggests that the Chinese recovery is also under threat and might lose steam until it gets fresh policy support, it said.

On June 14, shares of Vedanta were up 1.2 percent at Rs 281.15 and those of Nalco were up 0.9 percent at Rs 85.7 on the BSE.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.