Alumina to benefit from prolonged pandemic recovery boom: Russia/Ukraine crisis to push prices higher

By Market Index
Mon 28 Mar 22, 2:16pm (AEDT)

Key Points

  • Alumina prices have risen to US$528/t from US$345/t earlier this year
  • Russia is the world's second biggest aluminium producer after China with 6% global market share
  • Morgan Stanley expects Alumina to benefit from a potential upside to alumina input costs - bauxite, caustic and energy all declining - which could help support higher prices

The share price of aluminium pure-play Alumina (ASX: AWC), which owns 40% of Alcoa’s Alumina World Chemicals business, has been nudging higher on the back of a recent aluminium price surge.

Alumina prices have risen to US$528/t from US$345/t earlier this year.

Much of the price surge being experienced by aluminium can be attributed to efforts to cut Russia supplies off. As a case in point, sanctions by Australia are expected to cut around 20% of alumina supplies to Russia’s Rusal, a leading global aluminium producer.

The decision by Australia to cut Russia’s supplies is expected to have a significant impact on Rusal and only compounds supply chain issues already being experienced at the company’s Aughinish refinery in Ireland and the closure of its Nikolaev plant in Ukraine.

Rusal currently buys alumina from Australian companies and owns a 20% minority stake in Rio Tinto’s (ASX: RIO) QAL refinery in Gladstone.

Russia looks to China

To put Russia’s supply of aluminium in context, President Putin’s dictatorship produces around 4Mt of aluminium a year, making it the world's biggest producer after China with 6% global market share.

Unsurprisingly, Russia is expected to look to neighbouring countries, notably China to replace the near 50% alumina feedstock shortfall. Analysts at energy research and consultancy, Wood Mackenzie suspect one possible outcome could be Chinese buyers purchasing alumina and redirecting sales via Eastern Russian ports.

Upside for Alumina

Morgan Stanley expects Alumina to benefit from a potential upside to alumina input costs  - bauxite, caustic and energy all declining -  which could help support higher prices.

The broker suggests that if inflation continues and demand destruction is avoided, longer-term commodity price estimates -  especially for aluminium, alumina and zinc, which have high input costs - will need to be raised across the sector.

Morgan Stanley also expects elevated freight rates into China to assist in buoying alumina prices in 2022.

As a result, the broker maintains its Overweight rating and raises its target price to $2.30 from $2.10.

Due mostly to the exclusion of a negative impact of a deferred tax asset unwind in Spain, Alumina reported 2021 underlying earnings of US$226m, above broker expectations.


Alumina share price: A three month snapshot.

What other brokers think

While Macquarie notes a 10% move in alumina prices could potentially change Alumina’s earnings by 20-43%, the broker maintains a Neutral rating due to the potential near-term trade flow uncertainty from the export ban. The $2.00 target is unchanged.

Ord Minnett notes that Alumina’s earnings (at spot prices) more than double the consensus estimate and retains a Buy rating and $2.30 target.

With the Russia/Ukraine crisis expected to prolong the pandemic recovery boom – resulting in higher near-term commodity price forecasts – Citi increases Alumina’s FY22 profit forecast by 49%.

However, to reflect both a long asset life and a higher spot Australian dollar rate assumption, the broker retains a Neutral rating, with the target only increasing to $2.05 from $2.00.

Goldman Sachs has increased its 2022/2023/2024 earnings per share (EPS) forecasts by 24%, 39%, and22% respectively after incorporating recent aluminium price upgrades.

However, the broker rates Alumina Neutral due to valuation - trading at 0.9x NAV ($2.22/share); supportive dividend yield, but no production growth over the near to medium term; higher unit costs over 2022; and potential FCF (free cash flow) headwinds in 2022 on higher CAPEX and restructuring costs.

Consensus on Alumina is Moderate buy.

Alumina was up 2.76% two hours out from the close today.



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