There are not many large aluminum projects to be commissioned outside China over the next 2-3 years.
US sanctions and the asset freeze against Russian entity Rusal could further tighten aluminum markets, especially outside China. Rusal accounts for 14% of world ex-China demand, a large part of which is exported to the US and close ally EU, which run large aluminum deficits. Aluminum market deficits outside these geographies are minimal. The sanctions may also limit Rusal’s ability to complete new projects. Maintain BUY on HNDL, VEDL.
United States sanctions and freezes assets of Oleg Deripaska and UC Rusal: United States has imposed sanctions on and frozen assets of Oleg Deripaska (director at Rusal, ex-President) and UC Rusal which are in the US jurisdiction. US Rusal has been designated for sanctions/asset freeze for being owned or controlled by, directly or indirectly, by Oleg Deripaska.
UC Rusal among largest aluminum exporters ex-China; sanctions can constrain export flows: Rusal accounts for close to 6% of global aluminum supplies and 14% of world ex-China supplies. The company is one of largest aluminum exporters to world ex-China markets — the Russian aluminum exporter meets close to 10% of world ex-China demand. Sanctions against the company can have an adverse impact on the global aluminum supply chain.
There are not many large aluminum projects to be commissioned outside China over the next 2-3 years. Among the four large ramp-ups, two are to be commissioned by Rusal. If Rusal’s ability to complete these projects is hit due to these sanctions, we may see a further tightening of world ex-China aluminum markets.
We expect strong improvement in outlook in next two years; stocks discounting low returns: Post supply-side reforms, China has been more measured in approving new smelting capacities. Aluminum capacity growth in China will slow down post 2018: we expect additional capacity of (1) 3.3 mtpa in 2018, (2) only 1.3 mtpa in 2019, and (3) much less than
1 mtpa in 2020. Given the strong demand growth in China, this will likely reduce surplus in Chinese aluminum markets.
We highlight that CMP of non-ferrous stocks is factoring in low returns from aluminum operations. Aluminum has the best demand outlook among base metals and can see structural pricing improvement on lower Chinese supply growth and widening ex-China deficit. We maintain our positive view on HNDL (BUY, TP: Rs 315), VEDL (BUY, TP :Rs 445) and NACL (ADD).