This article first appeared in The Edge Financial Daily on October 5, 2018
KUALA LUMPUR: Aluminium stocks mounted a strong rally yesterday, tracking a surge in the aluminium price which touched a three-month high amid supply worries following the shutdown of the world’s largest alumina refinery in Brazil.
Press Metal Aluminium Holdings Bhd, Alcom Group Bhd and LB Aluminium Bhd were among the top gainers on Bursa Malaysia, which ended the day 6.19 points or 0.34% lower at 1,790.11 points.
Shares of Press Metal rose as much as 4.8% yesterday to hit a high of RM5.20 in intraday trading, before settling back to close at RM5.16, still up 20 sen or 4.03% from Wednesday’s close. In a single day, the company added RM810 million to its market value to close at RM20.35 billion.
Alcom shares surged as much as 43.1% to touch an intraday high of 83 sen, adding RM32.48 million to the company’s market value which stood at RM110.97 million at the end of trade yesterday. They closed up 24 sen or 41.38% to 82 sen.
LB Aluminium’s stock rallied 20.6% to hit an intraday high of 61.5 sen before settling at 60 sen, up nine sen or 17.65%. It saw a one-day market capitalisation (cap) gain of RM22.37 million. At the close its market cap stood at RM149.09 million.
The three stocks saw a combined gain of RM864.85 million in market cap.
Press Metal was among AmInvestment Bank’s trading picks yesterday, with the research house rating the counter a “buy” if it rebounds above RM5.
“Press Metal was testing the RM5 resistance level in its latest session. With a neutral RSI (Relative Strength Index) level, it may trend higher above this point with a target price of RM5.35, followed by RM5.73.
“Meanwhile, it may turn sideways if it fails to cross the RM5 mark in the near term. In this case, support is anticipated at RM4.60, whereby traders may exit on a breach to avoid the risk of a further correction,” said the research house.
Higher aluminium prices are positive for Press Metal, as seen in its latest quarterly results for the second quarter ended June 30, 2018 (2QFY18), which posted bottomline growth despite foreign exchange and derivative losses.
Its net profit for 2QFY18 rose 6.9% year-on-year (y-o-y) to RM160.6 million on the back of a 24.7% y-o-y increase in revenue to RM2.44 billion.
For the first half of its financial year, Press Metal’s net profit expanded 4.3% y-o-y to RM311.08 million, while revenue rose 17% y-o-y to RM4.56 billion.
In a note to clients, BIMB Securities Research analyst Mas Aida Che Mansor said while she notes that there is uncertainty on the global aluminium outlook, the resilience of aluminium prices thus far will benefit Press Metal.
While higher aluminium prices is a positive for Press Metal, higher alumina prices have the opposite effect. Alumina is the raw material required to produce primary aluminium.
According to UOB Kay Hian analyst Fong Kah Yan, alumina accounts for 35% of the group’s cost of goods sold.
“We note that Press Metal has locked in the bulk of its alumina requirement for 2018, with approximately 20% to 25% left unhedged. Year-to-date, alumina prices were on a rollercoaster ride, from the low of US$360 per tonne in March to hitting the peak of US$640 per tonne in May,” she said.
According to Reuters, three-month aluminium on the London Metal Exchange was up 2.6% at US$2,264 (RM9,388) a tonne yesterday, having touched its highest since June 14 at US$2,265.50, supported by worries over potential shortages after Norsk Hydro ASA announced a shutdown.
The gains, however, could be overdone because Norsk Hydro’s closure of the Alunorte alumina refinery in Brazil may only be temporary, Capital Economics analyst Ross Strachan told Reuters.
On Wednesday, Norsk Hydro announced that it would halt production indefinitely and lay off 4,700 people at its Alunorte refinery in Brazil. Previously, Norsk Hydro’s refinery produced six million tonnes of alumina per year, accounting for approximately 5% of global supply, before it decided to halve its output in March due to allegations of a toxic leak.
The development gave rise to concerns over the global supply of alumina, amid other supply constraints such as the US sanction on Russian producer Rusal and a workers’ strike at Alcoa’s alumina refineries in Australia.