KUALA LUMPUR: Aluminium prices will likely continue to climb next year by another 10% to US$2,200 (RM7,216) per tonne from the current average of US$2,000 per tonne as demand will continue to outstrip supply, predicts Press Metal Bhd.
“So far, the price of aluminium is still holding well because the world is in shortage of aluminium ... We believe that this deficit will continue [for] at least a few years,” said Press Metal group chief executive officer Datuk Paul Koon Poh Keong (pic). He was referring to the recent trend of an increasing all-in aluminium price, which he believes is just the beginning of the metal’s upcycle after years of downtrend.
This, he said, is due to fundamental factors like lower production of the metal in the West due to high cost over the last few years, growth in demand for aluminium in industries like construction and automotive, and the lack of production capacity in Asia.
High demand, coupled with the global aluminium deficit, has enabled Press Metal to sell its products at a premium above the London Metal Exchange benchmark, said Koon.
“Today’s market has a very high premium. In fact, it is a premium story today. Last year, the premium was about US$200 per tonne. This year, it has climbed up to about US$400 per tonne. We expect it [the premium] to grow some more,” said Koon.
And as the premium grows, Press Metal’s earnings are also expected to improve. Its net profit for the second quarter ended June of financial year 2014 (2QFY14) was RM60 million, double the previous quarter’s RM28 million, and triple from RM20 million in 2QFY13.
In a research note dated Sept 29, RHB Research said it expects Press Metal to record a higher core profit of RM80 million in 3QFY14 and RM90 million in 4Q, on the assumption that the all-in aluminium price will average US$2,300 per tonne in 3QFY14 and US$2,365 per tonne in 4Q.
Asia uses six million tonnes of aluminium per year, and Koon said Press Metal and a smaller outfit in Indonesia have been providing around 600,000 tonnes per year.
The company’s two smelting plants in Mukah and Bintulu, Sarawak, with a combined capacity of 440,000 tonnes per annum, is now operating at 98% capacity.
To take advantage of the hunger for aluminium, Koon said Press Metal is slowly shifting its focus to producing value-added products rather than simply exporting aluminium ingots. It is especially eyeing the automotive parts industry after having ventured into the production of alloy wheels last year.
Koon said car manufacturers like Ford Motors are starting to mass produce vehicles such as the Ford Truck F-150 in aluminium instead of steel — traditionally seen only in manufacturing of high-value vehicles — which will drive demand for aluminium even higher. Currently, 15% of Press Metal’s production is for the automotive sector and Koon hopes that this figure will double to 30% in 2015.
Press Metal’s share price has also risen in tandem with better earnings. Year-to-date, the smelter’s share price has skyrocketed 226% to RM7.37 in September, although it has come off since then. It closed up 32 sen at RM5.55 yesterday, giving it a market capitalisation of RM2.94 billion.
This article first appeared in The Edge Financial Daily, on October 24, 2014.