Rain Commodities Ltd. (RCOL), the world’s second-largest producer of calcined petroleum coke used to make aluminum, will miss its own profit forecast as a slide in prices of the metal prompts smelters to scale back output.
An aluminum supply glut and falling demand in China are causing many producers to shut down, hurting Rain Commodities, Chief Financial Officer T. Srinivasa Rao said in an interview. The Hyderabad, India-based company will no longer be able to meet its goal of doubling net income by the end of 2013, and instead will take two more years, he said.
The light weight metal used to make aircraft and beverage cans has declined 47 percent in the past five years, making it the third-worst performer on the UBS Bloomberg CMCI index of commodities. Aluminum Corp. of China, the country’s biggest producer, said last week it will halt some production after United Co. Rusal, the world’s largest, cut output by 4 percent in the first quarter as oversupply squeezed margins.
“At current prices, 75 percent of the smelters in the world would be incurring a loss,” Rao said. “Because of the global slowdown, we are seeing a lower performance.”
Rain Commodities shares fell 1.4 percent to 38.80 rupees yesterday in Mumbai, trimming gains in the past 12 months to 3.7 percent, according to data compiled by Bloomberg. The benchmark S&P BSE Sensex (SENSEX) has advanced 16 percent in the same period.
Rao had said in an interview in October that net income by the end of 2013 was set to be double the 6.64 billion rupees ($114 million) reported in 2011 after its U.S. unit agreed to pay 702 million euros for Ruetgers NV, a Belgian chemicals maker, including its debt. The median estimate of three analysts in a Bloomberg survey show profit this year may be 5.9 billion rupees.
Aluminum for delivery in three months traded at $1,932.50 a ton on the London Metal Exchange as of 1:35 p.m. local time yesterday after falling 8 percent in the quarter ended March 31, according to data compiled by Bloomberg. The rate needs to exceed $2,300 for metal producers to make money and help revive demand for calcined petroleum coke, Rao said.
Prices of the metal may remain capped as output globally, excluding China, is likely to outpace demand in these markets, Kenneth Hoffman, a senior metals analyst with Bloomberg Industries said in a note in April. A smaller surplus in the western world has not been enough to counterbalance the erosion of demand as a result of subdued economic growth in the developed economies, according to the report. Excess inventory narrowed to 936,000 tons last year from 4.13 million metric tons in 2009, according to data compiled by Bloomberg.
“China is slowing down and there’s economic uncertainty surrounding Europe, another large market,” said Vibhu Ratandhara, a vice president at Bonanza Commodities Brokers Pvt. in Mumbai. “The surplus has declined, but the prices have stalled, showing lack of demand.”
Export growth in China, the world’s second-biggest economy, slowed to a 10-month low in May, factory output rose a less-than-forecast 9.2 percent from a year earlier, while inflation fell to a 15-month low, signaling weaker global and domestic consumption. The 17-nation, euro-area economy is in its longest recession since the common currency started trading in 1999. Europe accounts for 30 percent of Rain’s revenue.
“The instability in the economy worldwide is our biggest concern,” Rao said. “Europe is a big worry.”
Chalco, as the Beijing-based Aluminum Corp. of China is known, said on June 5 that it will temporarily shut down about 380,000 tons of electrolytic aluminum capacity and added it will implement flexible output at some production lines. Rusal said in May that cuts announced by producers are “still not enough” given low prices and large stockpiles.
A weak global recovery still won’t wipe out demand for aluminum as consumption may still grow at 5 percent to 7 percent, helping Rain Commodities, said Milan Wadkar, an analyst at Indsec Securities and Finance Ltd. in Mumbai, who recommends buying the stock with a one-year target price of 53 rupees.
“There is no substitute for what these guys are producing unless technology changes,” he said. “There was only a handful of players in this market. With Rain being the second-largest, it gives them tremendous pricing power even in a downturn.”
Ruetgers, which was bought by Rain CII Carbon LLC last year, is spending $30 million on a plant in Russia along with its partner OAO Severstal (SVST) to increase coal tar distillation capacity by 30 percent, Rao said. Rain raised $400 million and 210 million euros through high-yield bonds to fund the acquisition.
The expansion and a global economic recovery that will lift aluminum consumption will help boost Rain Commodities profit in 2015, Rao said.
Ruetgers distills coal tar to make pitch products that are blended with calcined petroleum coke and pressed into anodes, which are baked in kilns for 17 days at a temperature of 1,250 degrees Celsius (2,282 degrees Fahrenheit) to produce aluminum, according to Aluminium Bahrain’s website. The anodes are replaced about every 28 days.
Rain, which also makes Priya Cement in India, has a total capacity to produce 2.4 million tons of calcined petroleum coke or about 8 percent of global output, according to the company’s website. N. Jagan Mohan Reddy, a graduate from Purdue University, formed Rain Calcining Ltd. in 1989, which was combined with Rain Commodities and Priyadarshani Cements Ltd. in 2004, according to the Business Standard newspaper.
The company is working toward increasing net cash generation to as much as $150 million as demand improves, from $80 million now, and plans to use internal accruals of as much as $500 million in four years to cut debt from $1.3 billion, Rao said.
“If one is looking to invest in the stock for six to eight months, one might not get the value asked for,” said Rohit Agarwal, an analyst at SPA Securities Ltd. in Mumbai. “The prospects are good over a two-year period as aluminum demand will be good once the global markets recover. These guys will be in a good position to benefit from that.”
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