Aluminium collapse affects CSR Ltd's building boom

Despite surging new home building, tumbling aluminium premiums have cast doubts over CSR's earnings prospects ahead of the building products group's full-year result next month.

As the Australian economy struggles to find growth to replace dwindling mining investment, new home building has been a rare bright spot with housing approvals and new starts soaring after years of underbuilding.

Deustche Bank analyst Emily Smith expected 203,200 new homes will be started in fiscal 2015 and 205,600 new homes in fiscal 2016, ahead of consensus forecasts and well ahead of the historical average of 152,400 homes.

"We remain optimistic on Australian housing demand on the basis of continued low interest rates, solid migration and reasonable employment," Ms Smith said.

Ms Smith said that CSR had the biggest exposure to the Australian residential market of the listed materials suppliers, but she was wary of the company's exposure to declining aluminium premiums.

Investors have been wise to the risks, with CSR shares shedding almost 7 per cent in April even as strong job numbers and dovish commentary from the Reserve Bank shored up confidence in the housing market.

Credit Suisse analyst Andrew Peros said the stock was no longer trading in line with the market but at a 20 per cent discount to the ASX 200.

"While this [discount] may be tempting for some investors, we retain a cautious valuation stance conscious of significant uncertainties across aluminium market, in addition to the emerging competitive threat in plasterboard," he said.

As well as its building products and glass businesses, CSR owns 36 per cent of the Tomago aluminium smelter in NSW through its 70 per cent stake in Gove Aluminium Finance.

The price CSR receives for its aluminium is based on the London Metal Exchange price, plus a regional premium for delivery of the physical metal.

The Main Japan Port premium hit a high of $US420 a tonne in December, and while Platts has quoted a July quarter premium of $US380 a tonne, Mr Peros said industry sources were reporting physical premiums in the spot market of $US250 a tonne.

"The precipitous decline in aluminium premiums has been exacerbated by uncontrolled smelter expansions in China," he said. "The speed at which prices have declined has created significant uncertainty around where prices may bottom."

CSR hedges a significant proportion of its sales so it may take some time for weaker aluminium markets to flow through to earnings. The fall in the Australian dollar against its US counterpart could also offset the impact of declining commodity prices.

Further uncertainty has been caused by the Chinese government's decision this month to remove export taxes on a range of commodities including semi-processed aluminium products.

China's 15 per cent export tax on primary aluminium is still in place, but there are concerns that prices and premiums could take a big hit if the impost is lessened or removed.

CSR reports full-year earnings on May 12.

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