Aluminium prices may stay firm; Hindalco, Nalco, Vedanta remain buy-on-dips: Axis Securities

Aluminium prices may have pulled back from recent highs, but the metal is unlikely to return to the low levels seen in previous years, according to Aditya Welekar, Senior Research Analyst-Metals at Axis Securities.

He believes a combination of supply constraints, rising production costs and strong demand fundamentals could keep prices supported over the medium term.

Aluminium prices recently climbed close to $3,800 per tonne before correcting to around $3,500 per tonne. The pullback has been driven by stronger-than-expected US economic data, which has raised concerns that the US Federal Reserve could resume interest rate hikes. Higher interest rates are generally negative for dollar-denominated commodities.

However, Welekar remains positive on the long-term outlook for the metal. "Structurally, the trajectory is well placed for aluminium," he said. Supply disruptions in the Middle East, which accounts for around 9% of global aluminium supply, and China's cap on smelting capacity have tightened market conditions.



Axis Securities expects the global aluminium market to remain in deficit this year. "In this calendar year, we expect 1.2 to 2 million tonne of deficit," Welekar said, adding that the supply-demand balance continues to favour higher prices.

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While new smelting capacity is expected to come online over the next few years, particularly in Indonesia, Welekar does not expect a flood of supply similar to what happened in the nickel market. He pointed out that aluminium production requires significant power capacity and infrastructure, which could slow the pace of expansion.

Higher energy costs are another factor supporting aluminium prices. Since aluminium production is highly energy-intensive, elevated power and gas prices, along with environmental regulations such as Europe's Carbon Border Adjustment Mechanism (CBAM), are pushing up production costs globally.

As a result, Welekar expects aluminium prices to remain above historical averages. "It should remain higher in the range of $3,000 to $2,800 per tonne," he said.

Despite his constructive long-term view, Welekar is cautious on the metals sector in the near term. Expectations of a possible US rate hike, upcoming inflation data and the seasonally weaker monsoon quarter could create volatility in metal stocks.

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For investors looking at the sector, he prefers a staggered approach. While he would wait for more clarity before making fresh recommendations, he believes stocks such as Vedanta, National Aluminium Company

and Vedanta remain attractive over the long term. According to Welekar, these companies are "buy on dips" candidates because of aluminium's favourable structural outlook.

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On steel, he noted that domestic prices continue to enjoy support from a discount to imported Chinese steel. However, after a sharp rise in recent months and with the monsoon season approaching, he expects steel prices to consolidate rather than move significantly higher in the near term.

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