Bright prospects for aluminium industry

Employees at an aluminium factory in China. — AFP

PETALING JAYA: The outlook for the aluminium sector is expected to remain positive, underpinned by the easing of Covid-19 restrictions in China and the likelihood of the rate hike cycle approaching a tail-end.

As for the outlook of the cement sector, RHB Research continues to maintain a cautiously optimistic stance.

This is on the back of a recent sharp correction in key raw material prices like coal, potential improvements in operating efficiency and earnings visibility for Cahya Mata Sarawak Bhd (CMS) due to the higher allocation for Sabah and Sarawak in Budget 2023.

“In the near term, the risk-reward profile for London Metal Exchange (LME) aluminium prices may remain positive, underpinned by low global aluminium inventory levels; the pick-up in aluminium adoption from the renewable energy and electric vehicle sectors and ramp-up in demand stemming from China’s economic recovery,” the brokerage said in a report recently.

RHB Research noted that since early this year, LME aluminium was trading at US$2,200 to US$2,600 (RM9,796 to RM11,577) per tonne.

Fears of a global economic slowdown that dampened the excitement over China’s reopening was the main attributable reason behind the correction in LME aluminium trading prices.

“Despite the US Federal Reserve raising its benchmark interest rate by 25 basis points at its recent meeting in March, the LME aluminium price remained steady at US$2,368 (RM10,544) per tonne on May 1 versus US$2,400 (RM10,687) per tonne in the first quarter of 2023,” the research house said.

Production levels in western Europe still did not surpass its prior peak of 262,000 tonnes that took place prior to the Russia-Ukraine war.

Moveover, demand still remains muted as high energy prices have deterred European smelters.

“Nevertheless, across the globe, aluminium production grew by 9.6% month-on-month in March,” RHB Research said.

It is also noteworthy that China’s purchasing managers’ index had declined slightly in April to 54.4 from 57 in March and had remained in the expansionary zone for four consecutive months.

Non-manufacturing construction PMI also contracted to 63.9 in April from 65.6 in March due to weaker new orders.

The research house said the elevated time lag in passing through the surge in coal prices by local cement producers resulted in average bulk cement selling prices to remain on the upside at RM390 per tonne as at March.

“According to the Statistics Department, cement production totalled 2.5 million tonnes in February – higher than the pre-pandemic monthly average of 1.3 million tonnes.

“Cement makers under our coverage –especially CMS – should be major beneficiaries of the higher Budget 2023 allocation,” the research house said.

The demand for cement in Sarawak is expected to provide earnings visibility for CMS.

This is underpinned by ongoing state construction projects such as the Baleh Dam (expected to be completed by 2026), Sarawak coastal roads, the state’s second trunk road and the Pan Borneo highway, added RHB Research.

The research house’s top pick for the aluminium sector is Press Metal Holdings Bhd, due to it being a proxy to the low-carbon-producing aluminium smelters in Asean and its benefits from the structural demand shift towards Asian smelters amid production disruptions in Europe.

RHB Research maintained a “buy” call on Press Metal with a target price of RM6.

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