TheChek News Flow

Aluminium premiums “higher for longer” was a key part of (fairly recent!) upgrade thesis. Premiums have started to come under pressure driven by Chinese exports & the prospect of further LME warehousing rule changes. We note that European premiums are down $80/t (c. 20%) from a peak of US$430/t. Our Metals strategist, Michael Widmer, lowers his aluminium price & premium assumptions today. We downgrade earnings for Hydro. 2015E EBITDA –25% to NOK12bn. 2015E EPS - 36% to NOK2.12. We set a new price objective of NOK40 based on 0.9x our 2015E DCF. At our target shares would trade on about 9x EBITDA.

We previously forecast a supply demand deficit of c. 1 Mtpa for 2015 on the assumption that Chinese would not be a material net exporter of primary aluminium. As with steel, Chinese exports are surprising to the upside, with sellers apparently exploiting a loophole to achieve VAT rebates from exports. Current exports imply a market in closer to 1 Mt surplus. We lower 2015E aluminium price 8% to US$1818/t / US$0.82/lb. We also lower assumed premium by $85/t (-22%) for 2015 & $139/t (41%) in 2016. As a reminder, a “premium” is paid on top of the quoted LME price for prompt physical delivery. Historically, these figures reflected “convenience yield” and potentially delivery from the next closest delivery point. More recently premiums have been distorted by long queues at metal warehouses and warehousing deals.

Premiums: At a recent analyst meeting, Glencore’s head of aluminium suggested that it wasn’t inconceivable that aluminium premiums could halve on a 12 month view. Currency: A weaker/weakening NOK was another driver of our positive view on Hydro. While not strengthening (yet) the stability in the oil price has led to a stabilization of the NOK at around 7/USD. With these headwinds, we struggle to see the earnings upgrade momentum continuing for Hydro, Q1 could be peak earnings.