Press Metal : Falling premiums and rising capacity, 22 Apr 2015

Press Metal

We maintain HOLD on Press Metal Bhd with an unchanged fair value of RM3.20/share – pegged to 14x FY15F PE.  Aluminium premiums have slumped YTD on the back of slowdown in Chinese demand, while new LME rules implemented earlier this year ensures that stocks are not held back in warehouses.

China, which produces half of the world’s primary aluminium, continues to add capacity. This resulted in aluminium shipments from China rising by 43% to 1.2million tonnes in the first three months of the year, according to the General Administration of Customs in Beijing. Last year, China increased output by 9%.

Increasing Chinese output (as well as exports) and a mixed global economic growth have resulted in global premiums falling by as a much as 23% YTD. According to Bloomberg data, the US Midwest free market premium fell as much as 23% YTD, while Japan and Singapore premiums fell by 14% and 20%, respectively (see Exhibit 1).

Rising shipments from China are expected to exert pressure on premiums, even as smelters elsewhere globally continue to cut capacity due to unfavourable energy costs. Already, the rising Chinese output has resulted in global primary aluminium recording a net surplus of 111,903 metric tonnes in January following nine months of deficit (see Exhibit 2).

Earlier this month, Alcoa – the largest aluminium producer in the US – has revised its expectation of global supply exceeding consumption by 326,000 metric tonnes for 2015. Back in January, it had forecasted a global deficit of 38,000 metric tonnes. Alcoa is also expecting slower demand of 6.5% for this year (the lowest in three years) compared to 9% in 2014. YTD, the LME aluminium spot price has been trading sideways, with an average of USD1,801.13/MT.

The change in global fundamentals reaffirms our HOLD call on Press Metal. We have imputed an all-in aluminium price of USD2,150/MT into our model.

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