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Rising LME prices and premiums to prop up the earnings of non-ferrous players

Aluminum prices rise; tight demand-supply to keep prices elevated

* LME aluminum prices have risen by 7-8% in the last one month, driven by a tight demand-supply situation. The global aluminum market is undergoing a structural transformation, which is likely to shift towards a supply deficit, mainly fueled by capacity constraints in China and a gradual recovery in global demand.

* The demand is improving for clean energy and infra development, pushing longterm consumption growth. However, the energy constraints, environmental regulations, and geopolitical shifts are limiting supply responsiveness.

* The Chinese govt. has set a domestic aluminum production cap at 45mt (~21.6mt in 1HCY25), slowing down its production growth in CY25. In addition, China has eliminated aluminum export tax rebates in Dec’24, which will reduce the aluminum exports by 8-10% in CY25 and will further tighten global supply.

* Although Indonesia and India are bringing new alumina and smelter projects online (e.g., Mempawah SGAR, Hindalco, and BALCO expansion), these developments are insufficient to cater to global demand growth. We expect the current aluminum price uptrend to be sustained in the near to medium term.

Elevated Midwest premium to offset the US tariff pressure

* The US imposed a 50% tariff on aluminum from Canada, Mexico, and other regions, which distorted global trade flows and increased domestic prices within the US (LME + Midwest premium).

* As of Oct’25, the US Midwest premium reached a historical high of USD1,735/t, which has surged 200% since Jan’25. This has reflected the tightening supply and reshaping cost structures across aluminum downstream manufacturers. Previously, Midwest premiums moved relatively independently of benchmark prices, reflecting regional logistics and supply-demand imbalances. Post-tariff, the premiums accommodate both domestic logistics costs and tariff burdens.

* The high premiums allow 1) domestic smelters to enhance margins and 2) importers (downstream manufacturers) to recover the costs levied due to high tariffs.

Positive commentary from Alcoa boosts sentiments

* Global aluminum producer Alcoa recently announced its 3Q results. While results were a miss vs. the street estimates, what stood out was the positive commentary on the sector outlook.

* Alcoa highlighted that it expects aluminum prices to remain firm after the recent uptick. Further, the Midwest premium it earned on the US aluminum production more than offset the negative effect of tariffs and other costs on aluminum imports. Tariffs have been a major concern for the sector, and positive commentary here has boosted investor sentiment.

Hindalco (HNDL) continues to be our preferred pick in this space

* We continue to like HNDL in the non-ferrous names due to a bottoming of the EBITDA/t in Novelis' business and a robust performance in the India business.

* The ongoing expansion is set to position HNDL as the global leader. Volume growth across geographies will remain stable for HNDL, and favorable pricing will limit cost pressure and maintain the margins in the medium term. Various cost-saving initiatives through renewable energy and captive coal push would drive earnings for HNDL.

* For Novelis, we expect EBITDA/t to bottom out in the coming quarter, after which we could see an improvement. Management is pursuing multiple mitigation plans, such as partial pass-through to customers, supply chain optimization, Midwest Premium arbitrage, and long-term domestic capacity expansion. The mitigation plan is expected to offset a significant portion of the tariff cost from 2HFY26, with full impact anticipated by 4QFY26.

* The stock trades at 6.2x FY27E EV/EBITDA and 1.5x FY27E P/B. We reiterate our BUY rating on HNDL with our SOTP-based TP of INR950.

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