Kotak Institutional Equities says that Chinese aluminum smelters are facing environment-led production restrictions whereas capacity cap is limiting future additions. With strong sequential demand recovery, global utilization has reached a decade high, has limited spare capacity and thin pipeline of fresh additions. Kotak Institutional Equities forecast a deficit market from CY2022E to keep aluminum prices elevated and upgrade our price assumptions by 30%/19% for FY2022/23E. Kotak raise earnings and Face Value of Hindalco to Rs 500 (from Rs 400 earlier), Nalco to Rs 65 (from Rs 35 earlier) and Vedanta to Rs 270 (from Rs 180 earlier)

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China’s latest five year plan aims to curb energy consumption intensity of GDP by 13.5% and emissions intensity of GDP by 18% by 2025, with peak emissions generation for the country targeted by 2030. Provinces like Inner Mongolia have started restricting aluminum production to meet its own quarterly energy consumption targets. While volume loss from these restrictions are not significant (<0.5% impact on annual volumes), it adds to the already deficit market and raises risk of future restrictions and similar actions by other provinces.

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China would be reaching its 47 mtpa capacity cap after a 2.2 mtpa addition in CY2021E. The government appears committed to reduce emissions and unlikely to raise the cap. Kotak estimates that the China market will remain in deficit over CY2021-25E. ><0.5% impact on annual volumes), it adds to the already deficit market and raises risk of future restrictions and similar actions by other provinces. China would be reaching its 47 mtpa capacity cap after a 2.2 mtpa addition in CY2021E. The government appears committed to reduce emissions and unlikely to raise the cap. Kotak estimates that the China market would remain in deficit over CY2021-25E.

Kotak says that Aluminum demand is currently witnessing strong synchronized growth from both, China and ex-China market, led by strong pent-up demand and favorable macro. Kotak forecasts China/World ex-China/Global demand growth at 4%/13%/7.6% yoy in CY2021E after +4.3%/-11.7%/-2.7% yoy in CY2020. Our revised CY2021E global demand at 67.5 mn tons is 6% higher than our earlier forecast at 63.7 mn tons (dated October 2020). The de-carbonization theme in China should provide fresh legs of growth with CRU forecasting 1.8-2 mn ton additional demand over 2021-25E led by investments in renewables and EVs.

Kotak increase their aluminum price assumptions by 30%/19% to US$2,300/2,150/2,200/ton for FY2022/23/24E respectively albeit lower than spot at US$2,500/ton factoring the near-term demand momentum, increasing restrictions in China and upcoming deficit market assumption. They raise EBITDA by 15%/14% for Hindalco, 28%/15% for Vedanta and 84%/60% for Nalco for FY2022/23E on higher aluminum, zinc prices and weaker INR forecast. 

Kotak Fair Value increases to Rs 500 (from Rs 400) for Hindalco, Rs270 (from Rs 180) for Vedanta and Rs 65 (from Rs 35) for Nalco on higher earnings and roll over to March 2023E. Kotak continues to prefer Hindalco over Vedanta and Nalco.