Nalco making windfall gains from buoyant alumina prices

National Aluminium Company (Nalco) is garnering windfall gains from the recent spike in global alumina prices. The company’s changed strategy to sell all of its surplus alumina at spot or index prices, instead of sealing long-term contracts, is bound to boost its revenue and profit.

Alumina contributes nearly 75 per cent to its Ebitda (earnings before interest, taxes, depreciation and amortisation). According to Nalco’s calculation, every $10 a tonne rise in international alumina prices boosts its Ebitda by ~850 million. Over the years, it is alumina and not aluminium that has been driving the governmentowned navratna company’s profitability. Each year, Nalco exports 1-1.2 million tonnes of surplus alumina.

Globally, alumina prices have surged 80 per cent since the US clamped sanctions on major Russian producer Rusal, leading to tighter supply. There was also recent market tightness due to a problem at Norsk Hydro’s Alunorte refinery in Brazil. Prices on the Alumina Price Index (API) have risen over $700 a tonne and Nalco is getting a premium of $10-15 a tonne over and above the API price — buyers are paying significantly more to secure shipments.

“In this month, Nalco has obtained the highest price in alumina per tonne, much above the $633 in the heydays of the metal market in 2006-07. Being among the lowest cost producers in the world, Nalco is reaping market benefits, which will have a direct bearing on the bottom line and Ebitda margin,” said T K Chand, chairman and managing director.

The spurt in alumina demand is helping the company bag contracts from the biggest aluminium producers in the world, including Anglo Australian Rio Tinto and Oslo-based Norsk Hydro, at attractive rates. The profit margins have been augmented by a strategic shift in its marketing strategy, of remaining close to a rising market by opting for spot sales through global tender, rather than longterm contracts.

“Nalco will be one of the key beneficiaries of the recent uptick in alumina prices and is better placed compared to peers, as over 75 per cent of its Ebitda comes from the alumina segment. Nalco’s earning has high sensitivity to the change in alumina prices; with every $20 a tonne change in alumina prices, the EPS (earnings per share) impact will be six per cent. We believe Nalco’s surplus production will allow the company to sell 1.25-1.28 million tonnes of alumina in FY19, aiding earnings,” Kotak Securities said in a research report.

Nalco saw an unusual 400 per cent year-on-year jump in net profit for the December quarter, from ~1.44 billion to ~7.22 billion. The March quarter results are awaited and the company hopes to post strong results. Apart from brighter demand-supply dynamics, aided by growth in the construction and power sectors, pick-up in the automobile segment and, of course, higher aluminium and alumina prices globally.