Hedging Against Falling Aluminum Prices using Aluminum Futures

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Aluminium Price is Falling due to trade war. Which stock to buy?

On one side aluminium price is falling globally. On the other side the cost of Alumina (raw material) is rising. But this increase in raw material cost is not visible in aluminium’s market price.

Why Aluminium price is falling? Because of the import duties imposed by USA. Donald Trump has been in sorts of trade war with China and few other countries.

Talking about Aluminium specifically, USA has imposed a tariff of 10% on Aluminium coming from Europe and China. Moreover, it has also put sanctions on RUSAL (second largest producer of Aluminium).

What does it mean for the world? Lower demand of Aluminium across the world. Why? Because USA is one of the biggest consumer of Aluminium in the world. Low demand is causing the price fall.

Current Price trend of Aluminium…

In last 12 months, the global price of aluminium has fallen by more than 17%. In Feb’18, its price was $2,255 per tonne. Today in Feb’19, its price is $1,839 per tonne.

In fact, if we will compare April’18 price of $2,597 per tonne, global aluminium price has fallen by 20%+ in just 10 months.

As a rule of thumb, when aluminium price trades at $2,000+ per tonne, price of alumina should trade at $370+ per tonne levels. But the price of Alumina as on today remains as high as $620 per tonne levels.

What does it means for the Aluminium companies? Lower profitability (margins). In this scenario, almost all Aluminium producers are facing huge problems.

The condition is not different for the two Indian Aluminium producers as well.

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Name of Stocks Market Cap (Rs.Cr.) Current Price (Rs.) 52W High Price (Rs.) Current Price below 52W High (%)
Hindalco 43,316.17 192.9 267.35 27.85%
NALCO 8,768.40 47 90.1 47.84%

Within last 12 months, Hindalco is trading at 27.85% below is 52 Week high, and NALCO at 47.84% below is 52 week high price.

Though comparison between 52W high is no way to judge price valuation of stocks, but it certainly gives a strong hint for further price analysis.

Which Indian Stock to Buy?

In the Aluminium sector, we have two heavyweight stocks, Hindalco and NALCO. The price of both these stocks have take a good beating in last 12 months.

Out of the two, I have picked NALCO as a better bet. Why? Because NALCO has the lowest cost of production of finished aluminium in the world.

This cost advantage is also reflected in its margins. As reported in moneycontrol, RoCE of these two stocks are as below:

  • Hindalco: RoCE – 2.05%.
  • NALCO: RoCE – 11.02%.

Profitability of NALCO far exceeds Hindalco. We will discuss about the business fundamentals of NALCO in more detail later. But for the moment, let’s concentrate on the price trend.

There are two scenarios here which makes NALCO as a good stock to watch-out for in next few months:

  1. In Aluminimum sector, NALCO has the most profitable business.
  2. Its price has corrected by more than 35% in last 12 months.

Business fundamentals of NALCO is rock solid. But still its price is falling. I am sure it is only a mid-term phenomenon (triggered more by USA-China trade war).

Hence I thought to do a more detailed fundamental analysis of NALCO. Here are my results:

Stock Analysis of NALCO…

#1. Aluminium Demand…

In year 2020, it was estimated that the global demand for Aluminium was 63.2 Million Tonnes.

In 2020, the demand took a massive beating due to trade war between USA and China, also involving EU and RUSAL. This has resulted in the price fall of global Aluminium prices.

Experts say that Aluminium demand will ‘not’ continue to dip in year 2020. Demand growth will be slow at rate of 4-5% in 2020. But for stock prices, it will be enough motivation to turn bullish.

Moreover, Aluminium demand cannot remain low only because of USA’s inflicted trade war. Why? Because of the uncompromisable utility of Aluminium in the world market. Presently there is virtually no economical alternative to Aluminium in the world. Major use of Aluminium are as follows:

  • Packaging.
  • Construction.
  • Electrical equipments.
  • Automobiles and Aviation industry etc.

Now we are ready for the detailed stock analysis of NALCO. I use my stock analysis worksheet to analyse my stocks.

#2. Debt & Cash position…

In last 10 years, NALCO has remained virtually debt free. For a company operating in Metal space, this is quite an exceptional achievement. Why? Because metal companies are very capital intensive. Hence companies has to resort to debt to fund its working capital, capital expenditure etc.

Also in last FY, NALCO reported a cash & bank balance of Rs.2,700 odd crores. In last FY (Mar’18), NALCO reported a net profit of Rs.1,300+ Crores. Comparing the cash position with PAT, NALCO has close to 2+ years profit sitting in its bank balance. This is quite an asset.

With so much liquid cash available at its disposal, NALCO can easily pay dividends to its shareholders, and can also plan more share buybacks in next months.

Why share buyback? Because it looks like NALCO may be trading at undervalued price levels. In Nov’18, NALCO has already offered one share buyback proposal at Rs.75 per share.

In FY ending Mar’18, NALCO has paid Rs.900+ crores as dividends to its shareholders.

At current price level of Rs.48 per share, NALCO’s dividend yield is @10% p.a. This is again a reliable signal of undervaluation.

#3. Growth Rates…

I personally feel that NALCO is not a kind of company which can trigger price rise with its ‘growth’ numbers. Why I say so?

Because of its below average growth rate numbers shown in last 10 years. These are numbers computed by my stock analysis worksheet for NALCO:

If this is so, why I am interested in this stock?

Because of its price valuation. I believe that, at current price levels, NALCO can be a good buy. When shares are bought at such undervalued price levels, future price rise is almost inevitable.

#4. Price valuation…

I used my stock analysis worksheet to estimate the intrinsic value of NALCO. It comes out to be greatly undervalued. Look at the results here.

  • Current Market Price: Rs.47.3
  • Estimated Intrinsic Value: Rs.87.6

Having said that, I’m also aware that even such undervaluation will not help the ‘stock to grow’ till the global Aluminium market recovers. It is important for global Aluminium price to start rising back to $2,200/tonne levels to render profits for NALCO’s investors.

But I believe that in next 12-16 months, Aluminium prices will reach newer heights.

Final Words…

[You can access final report of my stock analysis worksheet here in PDF.]

Currently the aluminium price is falling. But this price fall is not likely to continue in year 2020-20. The price rise is almost imminent. Why?

Because experts say that the current Aluminium prices are already so low that, few companies are operating at break-even levels. So it will not be wrong to assume that $1,840 per tonne is already a rock-bottom price.

This is about the price.

The overall business fundamentals of NALCO is also decent. Why I say decent and not good? Because NALCO being a public sector enterprise, has its own share of disadvantages.

There is too much intervention of Indian Government in these “Navratna” companies. This is the reason why most experts refrain themselves from suggesting these PSU stocks.

But at such price levels, even these stocks becomes a mouth watering proposal.

The overall rating of NALCO as suggested by my stock analysis worksheet is looking like this:

I am targeting NALCO for myself based on following parameters:

  • Buy Price: Rs.48 or below.
  • Target Price: Rs.60 or above.
  • Holding Period: 12 to 16 months.

Chinese Miners Short BTC Markets to Hedge Against Falling Prices

The price of bitcoin core (BTC) has dropped considerably over the past few months, significantly affecting individuals and organizations that mine the cryptocurrency. According to recent reports, many miners in China are now short selling bitcoins to hedge against falling digital asset prices.

Some Chinese Miners Are Short Selling BTC

Due to the recent low prices of many cryptocurrencies, mining has become less profitable. Back when digital asset prices were higher, miners would hold coins for longer periods of time, but one Chinese miner believes this is no longer the case. Earlier this week, miner Jin Xin told a Chinese-language news outlet that many of his fellow miners have been short selling BTC to hedge against bearish market conditions.

“If I mine 30 coins in the next month, while the price may continue to fall by another 10 percent according to the current trend, I shall place a short order on the exchange to sell them at the current price, but deliver one month later,” Jin said.

The Chinese miner further explained that a large number of local miners are short selling as an act of “self-defense.” Jin said that unless they short sell BTC, some miners will be “ultimately eliminated.”

He also explained that he has been purchasing secondhand miners and using them until the machines reach the point of unprofitability. He then dismantles them and sells off the parts. If cryptocurrency market sentiment becomes bullish again, he said that he will purchase more machines and repeat the cycle.

The BTC hashrate has declined considerably over the last three months.

Shorting, Selling Mining Rigs and Relocating

There’s been a lot of discussion about mining profitability lately because of low digital asset prices. Hashrate has been shifting and SHA256-mineable coins like bitcoin cash (BCH) and BTC have seen a significant decline in overall global hashrate. The BTC network, for instance, has lost upward of 22 exahash since last September. There have also been local reports of SHA256 miners being sold by the kilo to hedge against operating losses. But some miners are not giving up so easily and are attempting to relocate, according to a recent study published by Coinshares.

Although BTC prices were just above $3,500, BTC/USD short positions rose to 37,216 orders on Dec. 6, 2020.

Chinese miners short selling digital assets is unusual, because the practice of shorting financial markets has been frowned upon in the country since 2020, even though there are rules that still facilitate the practice. Bitcoin miners in China may be following the direction of gold miners in the country, as they have been accused of the same short-selling methods. Speculative short-selling practices in China’s gold and silver markets have broken records this year, according to analysts. And on Dec. 6, even with BTC prices just above the range of $3,500 per coin, data from BTC/USD shorts on the Hong Kong-based Bitfinex exchange touched all-time highs.

What do you think about Chinese miners short selling to hedge against falling cryptocurrency prices? Let us know in the comments section below.

Images via Shutterstock, Blockchain.com, Trading View, and Pixabay.

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