Shares of Aditya Birla Group company Hindalco Industries and state-owned Nalco rallied up to 5% on Wednesday after aluminium prices surged to a four-year high amid escalating Iran war tensions and concerns over possible production cuts in China, the world’s largest aluminium producer.
The rally was also supported by expectations of strong business performance following healthy March quarter revenues. Market experts believe Hindalco is likely to outperform its peers in the near term, aided by improving performance across business segments and rising aluminium prices globally.
Shares of Hindalco climbed as much as 4.5% to hit a fresh 52-week high of ₹1,154 on the BSE, while Nalco surged 5.1% to ₹437.50. On the London Metal Exchange (LME), aluminium prices rose 0.6% to $3,672.50 per metric tonne, the highest level since March 7, 2022.
According to a Bloomberg report, traders are increasingly worried that Chinese aluminium smelters may be asked to reduce production as Beijing intensifies scrutiny of energy consumption and emissions across major industries.
Chinese smelters have been operating at full capacity amid a global supply shortage triggered by the Middle East conflict. Aluminium prices on the LME have steadily risen since the war began in late February as supplies from the region were disrupted following the effective blockade of the Strait of Hormuz.
The report further stated that Chinese authorities are looking to curb excess production as inventories continue to rise. China’s Ministry of Industry and Information Technology said on May 13 that industries including steel and oil refining would also face increased scrutiny.
Morgan Stanley bullish on aluminium outlook
According to media reports, Investment bank Morgan Stanley said the medium-term demand-supply outlook for aluminium remains favourable, supported by strong sustainability-driven demand and constrained supply growth due to China’s smelter capacity caps and slow expansion in other regions.
The brokerage said near-term factors such as China’s supply discipline, disruptions in the Middle East, and elevated energy costs are likely to keep aluminium prices firm. It added that favourable positioning on the global cost curve and low inventories outside the US should help restrict downside risks.
Analysts at Morgan Stanley also said India is entering a multi-year growth cycle, which is expected to drive strong demand for aluminium and copper.
The brokerage described aluminium as its preferred base metal because of a tighter global demand-supply balance. According to the report, supply growth remains constrained due to China’s capacity cap, slower production ramp-up in Indonesia because of power limitations, and limited expansion in other regions.
Morgan Stanley further noted that recent Middle East disruptions have tightened the aluminium market further, with some supply losses expected to persist because restarting production facilities could take considerable time. This has pushed both LME prices and regional premia higher across Japan, Europe, and the US.
The brokerage also highlighted that the forward curve remains in steep backwardation while LME on-warrant inventories are hovering near multi-month lows amid strong withdrawal demand in Asia. Although tight inventories and cost support may limit downside risks, the brokerage cautioned that any deterioration in global economic growth could weigh on demand.
“LME inventories remain near historical lows, reflecting tight physical markets and limited buffer against shocks,” Morgan Stanley said. The brokerage added that constrained supply flexibility, due to China’s capacity cap and slower ex-China capacity additions, increases the risk of sharp price spikes during periods of strong demand or supply disruptions.
Morgan Stanley also initiated coverage on Hindalco with an ‘Overweight’ rating and assigned a target price of ₹1,325, implying an upside potential of more than 20% from the previous closing price. According to the brokerage, Hindalco remains well positioned for value unlocking, supported by strong free cash flow generation potential over the medium term.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
