KUALA LUMPUR: The increase in alumina prices by 8.0 per cent to 3,241 yuan per metric tonne (/MT) during the first quarter of 2024 (1Q24), primarily due to supply disruptions in Guinea and Australia, might have adverse implications for Press Metal Aluminium Bhd's smelting margins.
Nonetheless, this impact could potentially be offset by a modestly improved contribution from its associate, PT Bintan Alumina Indonesia, attributed to higher alumina average selling prices, according to analysis from Hong Leong Investment Bank (HLIB) Research.
"Additionally, carbon anode prices continued to decline in the first quarter of 2024 by 7 per cent quarter-on-quarter, attributed to oversupply in petroleum coke.
"Despite the lagging MJP premium behind the rising freight costs in 1Q24, it is expected to catch up starting from the second quarter of 2024 onwards, as Major Japan Port (MJP) spot premium surged by 60 per cent QoQ to US$145/MT in the second quarter of 2024 (2Q24)," it said.
HLIB Research noted that since the Red Sea attacks, freight costs have risen by approximately US$80/MT.
"However, in 1Q24, the MJP spot premium remained behind, it is expected that the MJP premium will align with the increase in freight costs starting from the second quarter of 2024 onwards.
"According to S&P Global, the MJP premium for the first shipment of the 2Q24 surged by 60 per cent QoQ to US$145/MT, surpassing the entire premium for 2023," it added.
However, the company noted that despite this, the enhancement in demand fundamentals has been limited since the start of the year, since the increase in the Major Japan Port (MJP) premium has primarily offset the pressures of logistical costs.
The investment bank cautioned that, although there are indications of improvement, it is wise to remain cautious.
"China's official manufacturing purchasing managers index (PMI) rebounded in March to a one-year high of 50.8, ending five months of contraction.
"This development has driven LME aluminium prices above US$2,400 per metric ton. However, the sustainability of this recovery remains uncertain, as it could be influenced by temporary factors such as China's stimulus policies," it added.
According to HLIB Research, Bloomberg Intelligence predicts that the surplus in the aluminium market will decrease in 2024 due to China's gradual rebound in demand and a reduction in output growth, along with the possibility of increased orders from other global regions as inflation subsides.
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The firm expects Press Metal's core earnings for 1Q24 to fall within the range of RM330 million to RM350 million, showing a 7 per cent increase quarter-on-quarter (QoQ), and a 13 per cent to 20 per cent rise year-on-year (YoY).
"We maintain a hold call on Press Metal with a higher target price of RM4.65, from RM4.38.
"We are positive about the company as its cost structure benefits from long-term power purchase agreements (PPAs) with Sarawak Energy, ensuring stable energy costs for 15–25 years.
"Press Metal has established itself as a reliable investment option for aluminium in Malaysia, and its smelters powered by hydroelectric energy contribute to a favourable environmental, social, and governance (ESG) profile," it noted.