CICC forecasts further alumina price cut on shrinking demand

Aluminum Corp of China (Chalco, 601600.SH; 2600.HK) announced recently to cut its spot alumina price by 9.4 percent from 3,200 yuan per ton to 2,900 yuan per ton starting from October 6.
China International Capital Corporation (CICC) holds that as the demand for electrolytic aluminum decreases, its price has dropped remarkably and the output is squeezed. As a result, the demand for alumina is slashed.

CICC deems that the price will keep a slow-paced decline in the future. On the one hand, the alumina demand will continue shrinking to further press the price; on the other hand, the current alumina price has been almost close to the production cost that would become a strong support to the price and slow down its downward pace.

Although the price cut is expected to place limited impact on Chalco as the spot alumina profit only makes up 15 percent of the total, CICC predicts that the Chalco's 3-quarter performance will be lower than market expectation on sliding electrolytic aluminum price and high energy cost. Therefore, CICC will continue cutting its forecast for Chalco's 2008 profit.

CICC stresses that the P/E ratio and P/B ratio of Chalco's A share on expected 2008 earnings is 21 multiples and 1.9 multiples, and that of H share is 9.1 multiples and 0.8 multiples, all higher than its international peers. Thus, CICC maintains "neutral" rating for the aluminum smelter.

Chalco A share dropped 2.4 percent Wednesday to 8.12 yuan following the main index decrease of 3.04 percent; while the H share sharply plunged 19.765 percent to 3.41 HK dollars.

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