Stock of India’s Hindalco Industries Ltd. has experienced a 6% correction over the last two trading periods on the National Stock Exchange of India. Experts say the slide in the Aditya Birla Group subsidiary is due to a similar dip in the price of primary aluminium on the LME.
Although the sector has experienced a rise in demand of 6%, existing aluminium inventories have increased even more. Experts say that the increase in inventories is due to a restart of several smelters in China in February. Chinese speculators appear to be responsible for most of the demand.
“If we use daily transaction volume as an indicator to show how ‘speculative’ the specific commodity futures market is, we can see clearly that SHFE (Shanghai futures exchange) aluminium has attracted more speculation than other base metals,” said Sumangal Nivetia of Macquire. “If the ‘hot money’ retreats from the commodity market, either due to stricter supervision or higher cost from higher brokerage commission and margin requirement, the aluminium price should see more pain than other base metals.”
At present, aluminium’s prices are in a state of backwardation, which is a situation where futures contracts are selling at below the current spot price.
“A large chunk of inventories is held by traders, banks or is locked in financial deals,” said Abhishek Poddar of Kotak Securities. “Any rise in the interest rates will increase the cost of carry and lead to sharp unwinding — a material risk to aluminium prices.”
Hindalco has no plans for adding capacity in the near future, and the current facilities are running at 85% of the existing capacity. At present, Hindalco’s stock is trading at seven times EV/EBIDTA (enterprise value to earnings before interest depreciation and tax). Historically, most metals and mining companies, both in India and worldwide, trade at between five and six times EV/EBIDTA.