India’s Odisha-based National Aluminium Company (NALCO) is accumulating windfall gains from a recent spike in global alumina prices.
The company’s strategy is to sell all of its surplus alumina at spot or index prices, instead of sealing long-term contracts, a move that will definitely boost its revenue and profit.
Alumina contributes nearly 75 per cent to NALCO’s earnings before interest, taxes, depreciation and amortization (EBITDA). According to Nalco’s calculation, every $10 a tonne rise in international alumina prices boosts its EBITDA by Rs 85 crore. During these past few years, it is alumina and not aluminium that has been driving the 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 a tighter supply.
Alumina market also tightened recently 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 their shipments.
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 long-term 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.