KUCHING: Aluminum prices should stabilise as the research arm of Kenanga Investment Bank Bhd (Kenanga Research) does not expect further inventory buildup ahead despite the US-China trade disputes.
According to Kenanga Research, aluminum prices softened in the first quarter of 2018 (1Q18) as China officially declared its winter season over, signaling that production restarts would be permitted.
“In tandem with rising inventories, the London Metal Exchange (LME) prices weakened by 13 per cent to US$1,969 per metric tonne (MT), although we note that year to date (YTD) prices at US$2,142 per MT remains comfortably above our US$2,000 per MT average forecast.
“Note, however, that with strong ringgit performance against the US dollar, aluminum prices in ringgit has underperformed exchange prices with a 17 per cent decline to RM7,608 per MT YTD,” the research arm said.
Kenanga Research viewed this correction as expected, however, and did not expect further significant aluminum price decline for the year.
“Ringgit is also unlikely to see further strengthening at this point, as its current levels near RM3.90 per dollar is in line with our in-house economists’ forecast of RM3.90 per dollar.”
Kenanga Research highlighted that global aluminum stockpiles rose in 1Q18, from a stable 3.5 million MT through the whole of the second half of 2018 (2H18), to nearly four million MT as of March 2018, which contributed to the recent price decline.
While the research arm observed that production and demand have been fairly close in 2H18, production appeared to outweigh usage in the winter months, possibly due to Chinese production cuts being lower than indicated by government directives.
“Nevertheless, we note that this remains lower than 2016 inventory levels that peaked at slightly under 4.1 million MT, indicating that the build-up is not unusual and should head downwards once demand normalises in the warmer months.”
Looking ahead, Kenanga Research did not expect the US-China aluminum trade spat to affect Press Metal Aluminium Holdings Bhd (Press Metal) as the company exports minimal quantity to either country.
The research arm noted that the main impact would be on London Metals Exchange (LME) aluminum prices, on which Press Metal’s selling prices are based.
Nevertheless, with more than 50 per cent of production hedged, Kenanga Research expected Press Metal’s earnings to see low volatility.
The research arm noted that this is because any price risks would take circa six months to be reflected, while Press Metal’s low unit production cost of circa US$1,550 per MT would support the group’s profitability, especially compared to high-cost producers in both US and China.
“Even after our earnings adjustment, we believe the knee-jerk selling reaction by the market recently was unjustified given the solid outlook discussed above, and we upgrade our call to ‘outperform’.”