Press Metal will likely record a significant rise in FY21-22 earnings as there has been a divergence between alumina cost and aluminium price caused by China’s limit on aluminium production, coupled with the abundance of alumina supply.
KUCHING: Press Metal Aluminium Holdings Bhd (Press Metal) will likely record a significant rise in its financial year 2021-2022 (FY21-22) earnings as there has been a divergence between alumina cost and aluminium price caused by China’s limit on aluminium production, coupled with the abundance of alumina supply.
According to the research arm of Hong Leong Investment Bank Bhd (HLIB Research), there has been a divergence with regards to alumina and aluminium prices as alumina and bauxite supply (not energy intensive) has been abundant as compared to aluminium (energy intensive).
“This is largely attributable to the production cap of 45 million tonnes per annum (mtpa) implemented by China to curb its coal usage in order to reduce carbon emissions as more than 80 per cent of smelters in China are coal-fired,” HLIB Research said.
“Hence, we have revised our assumptions on Alumina cost as a percentage of price from 18.5 per cent previously to 16.5 per cent for FY21-22f despite its current year to date (YTD) average of circa 15 per cent as we choose to be on the more conservative end of our forecasts.
“Recall that Alumina cost as a percentage of London Metal Exchange (LME) aluminium price typically ranges from 15.5 to 18.5 per cent.”
Going forward, HLIB Research believed that the demand and supply dynamics is becoming more favourable for Press Metal.
This was based on reasons which include the high cost of China’s smelters, particularly those who are operating coal-fired power plants, rendering it unattractive for them to increase its production capacity, besides the capacity cap implemented.
The research arm also highlighted that there will only be 720,000mt of additional capacity coming on stream in 2021 (320,000 mtpa: Press Metal, circa 400,000 mtpa: UC Rusal) with no material planned increases in capacity expected in 2022.
Furthermore, aluminium demand is expected to record a sharp recovery from the timeline of vaccine rollouts.
HLIB Research noted that China has also been a net importer of aluminium in the second half of 2020 (2H20) due to its smelters operating below full capacity from high electricity costs.
The research arm further noted that Press Metal’s hydro-run smelter would also mean that the group’s aluminium is produced using renewable energy (RE) and this bodes well with its clients who are aiming to be more Environmental, Social and Governance (ESG) centric.
Additionally, decarbonisation initiatives around the world is also driving aluminium demand as transportation mediums like electric vehicle, rail transits and RE utilises a lot of aluminium.
“Press Metal is confident that it can be included into the FTSE4Good Bursa Malaysia index, targeting a score of more than 2.9. In order to achieve this, Press Metal plans to enhance its ESG framework and disclosure.
“It plans to vie for Aluminium Stewardship Initiatives (ASI) certification — a global ESG standard for aluminium industry — and the company is working its way towards obtaining the certification for its Samalaju plants, which is expected to commence between August 2021 and March 2022.”
Overall, HLIB Research upgraded its earnings forecasts by 21-20 per cent for FY21-22 as the research arm decreased its alumina cost assumptions by two per cent while maintaining its aluminium price forecast at US$2,000-2,100 per mt.
As such, FY21-22 core profit after tax and minority interest (PATMI) forecasts has been revised upwards to RM913.7 million and RM1.2 billion, respectively.
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