LME aluminium to hit $4,000/ton? Indian stocks Vedanta, Hindalco upgraded

Aluminium prices could rise as high as $4,000 per ton on the London Metal Exchange if supply remains constrained through the Strait of Hormuz, experts said. 

Aluminium prices have surged to a four-year high, taking centre stage in market discussions at the start of the week. This sharp increase is driven by the serious implications of a complete naval blockade of the Strait of Hormuz. 

The market was already under pressure, and the loss of output from a key Middle Eastern producer, following recent attacks in a region that is a significant global supplier, has further exacerbated the tightness in aluminium supply.

Geopolitical risks drive aluminium price surge

The metals markets are currently grappling with two opposing forces. A significant economic slowdown is generally depressing prices across the board. However, simultaneous concerns about supply constraints are pushing up the cost of specific metals. 

Primary aluminium, in particular, is affected by these supply worries, largely because the Gulf region is a crucial source for this commodity.

A significant indicator of market strain is the sharp increase in near-term pricing. Specifically, the cash-to-three-month spread has widened dramatically, reaching its largest level since 2007. 

Aluminium prices on LME saw another significant climb on Thursday, now trading at over $3,630 per ton. This marks a 13% increase from the end of February and is its highest price since late March 2022, shortly after the conflict in Ukraine began.

Furthermore, the futures curve on the aluminium market, which was already in backwardation prior to the war in Ukraine, is now falling even more sharply, according to Commerzbank AG. 

“The nearest-month futures contract is trading almost 10% higher than the one due in a year’s time, whereas the price differential was barely half that level a month ago,” Barbara Lambrecht, commodity analyst at Commerzbank said. 

Commerzbank’s model projections indicated the potential for further increases in aluminium prices, already at a four-year high. Specifically, if the Strait of Hormuz remains closed through the end of May, the price of aluminium could see a temporary surge to nearly $4,000 per ton.

Indian aluminium stocks see ratings boost

The crunch in supply is also having a positive impact on Indian aluminium stocks as well. 

Recently, JP Morgan upgraded the ratings for Indian aluminium producers Vedanta and Hindalco from 'Neutral' to 'Buy'. This bullish stance is based on the expectation that sustained strong aluminium prices will lead to improved earnings visibility for these companies.

The brokerage increased its target prices for two major metals companies in India, citing elevated aluminium prices driven by geopolitical risks in West Asia. The firm raised its target for Vedanta from INR 680 to INR 850, suggesting a potential 22% increase. 

Similarly, the target for Hindalco was lifted from INR 875 to INR 1,125, implying a 20% upside. This outlook prompted JP Morgan to revise its LME aluminium price forecasts for the future, now predicting $3,250 per tonne for FY27 and $3,150 per tonne for FY28.

Vedanta's stock has significantly outperformed the Nifty Next 50 across most time frames, demonstrating strong long-term outperformance. In the near term, Hindalco's stock has also performed well, comfortably exceeding the NIFTY 50 benchmark.

On Thursday, shares of Vedanta closed nearly 2% at INR 781.10, while Hindalco closed at INR 1,040.25, up 2.9%.