Aluminum Corporation of China (NYSE:ACH) - Low aluminum prices to dent profitability going forward.

The recent deterioration in the auto and construction sectors in particular has resulted in a steep decline in demand for aluminum. Globally, many aluminum producers have become unprofitable given the current aluminum prices and production cuts worldwide. Due to underutilization of existing capacity Chalco is implementing a major cut in capital expenditure. As we do not expect recovery in the auto and construction sectors in 2009, we expect demand for aluminum to remain sluggish. We therefore expect the company¡¯s realized prices to decline y-o-y during FY 2009, despite recent slight increases in its alumina prices in line with the increase in Chinese spot prices. We do however expect a recovery in demand for aluminum in FY 2010 reflecting the effect of stimulus packages announced by central banks globally. The recently signed deal with Rio Tinto to diversify its operations is expected to support revenues, while various other measures taken by the Chinese government to increase auto sales are also likely to have a positive impact on demand for aluminum. Nevertheless the outlook for the aluminum industry looks bleak in the near term. We do not see near term respite for aluminum prices and given that the common stock price has appreciated significantly since our previous update report we believe company is now overvalued.

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