Russia’s war with Ukraine is bringing about another round of turbulence for supply-chain problems across the globe. Russia is a commodity powerhouse, being a net exporter of many. Analysts at domestic brokerage firm Motilal Oswal believe sanctions on Russia will impact the prices of aluminium, nickel, steel, thermal coal, and PCI coal positively. The brokerage firm has raised EBITDA estimates of various domestic commodity companies and expects stocks to react positively as prices rise. Coal India, Hindalco and National Aluminium Co. are stocks that the brokerage firm is bullish on.
Russia — commodity powerhouse
Russia has been termed as a commodity powerhouse by Motilal Oswal. In 2020, the country was the second-largest producer of crude oil, it was the fourth-largest producer of steel closely behind Japan and India ahead of it. Russia is also a large producer of aluminium and nickel. Russia currently accounts for around 9-10% of global aluminium exports and about 11-12% of nickel exports, 20% of thermal coal exports, and 12% of global steel trade (excluding intra-regional trade). “We believe sanctions on Russia will impact the prices of aluminium, nickel, steel, thermal coal, and PCI coal positively,” Motilal Oswal said.
Steel, thermal coal and aluminium prices likely to soar
Russia exported 9-10% of global aluminium exports in 2020. Motilal Oswal said that sanctions on RUSAL (the aluminium company of Russia) could exacerbate the supply crunch in an already tight aluminium market. “India is a net exporter of aluminium and companies such as Hindalco, National Aluminum, and Vedanta will benefit from the elevated aluminium prices,” they said. Further sanctions are likely to force a shortage of steel in Europe, forcing prices higher. “We also expect demand for semi-finished steel to improve sharply in the near term that will push export prices for both billets and slabs, and ultimately impact domestic steel prices positively,” the brokerage firm said.
European countries are now expected to trim their dependence on Russian gas, increasing the consumption of thermal coal. Global thermal coal trade in CY19 was around 987mt of which Russia supplied 170mt and accounted for ~19% of world exports. Russia accounted for ~47% of EU coal imports. “We believe several European countries are likely to resume thermal power plants as a medium-term arrangement before completely moving away from Russian gas until their goal of 100% renewable source of power is achieved,” the report said. Coal India is expected to benefit.
Stocks to buy
Hindalco: Buy
Hindalco is seen as a prime beneficiary of rising commodity prices. “Hindalco will benefit substantially from the sanctions on Russian aluminium due to its strong exposure in both upstream as well as downstream segments,” said analysts. The stock is trading at 5.1x/5.2x FY23/24 EV/EBITDA estimates. Revenue estimates for the next fiscal year for Hindalco have been increased by 8.4% and Net profit revised 12.8% higher. The target price is set at Rs 700 per share.
National Aluminium Co: Buy
Sanctions on Russia, in particular on RUSAL, are expected to benefit National Aluminium directly. “National Aluminium benefits from its captive bauxite mines, and coal linkages with Coal India,” Motilal Oswal said. The company is a regular dividend-paying company with no stress on the balance sheet. Analysts see the stock rising to Rs 184 apiece.
Coal India: Buy
Germany has already announced the resumption of several coal-fired power plants and the extension of life of three nuclear plants slated for decommissioning in 2022. This bodes for Coal India, which will benefit from the rising prices of coal. The brokerage firm has a targt price of Rs 245 per share on Coal India.
