Aluminum Corp of China (Chalco), the mainland's largest producer of the metal, has told the Hong Kong stock exchange it expects to announce a profit for the first quarter after recording a loss last year.
The chief reason for the turnaround, said analysts, was a rebound in aluminium prices.
While Chalco gave no detail, Taifook Securities analyst Robin Tsui forecast a net profit of 400 million yuan (HK$454 million). He said the company made heavy provisions for impairment for the last quarter of 2009 which dragged down profits.
Chalco reported a loss of 4.68 billion yuan for last year, compared with a net profit of 168.6 million yuan in 2008. It had to write-off a total of 674 million yuan for losses stemming from the disposal of obsolete smelting facilities and replacement of old environmental protection facilities, Helen Lau, senior analyst at UOB Kay Hian, said.
Revenue dropped to 70.27 billion yuan in 2009 from 76.73 billion yuan for 2008.
Analysts said this year Chalco would benefit from the return of global demand for aluminium, driven mainly by China, and higher prices of the metal.
Lau said in her research note that Chalco expected the rise in aluminium prices could cover expenses in the first quarter, resulting in it posting a profit estimate.
The metal has rebounded as high as US$2,400 per tonne from a low of US$1,500 last year and has been trading above US$2,300 for the past few months.
But analysts expect prices will remain volatile this year, which can hurt Chalco in upcoming months. They said that if prices of the metal fall below US$2,000 per tonne, producers could slip into the red.
'I don't expect Chalco's profits for the whole of 2010 would match its heydays of 2006 and 2007,' Tsui said. 'But it has a chance of generating good returns this year provided the price of aluminium can remain at current levels.'
Swiss bank UBS recently raised all commodity price forecasts, largely to reflect China's strong demand for metals, including aluminium. The bank also expects Europe and the United States to buy more metals this year. It has raised its estimates on global aluminium prices for the year by 21 per cent to US$2,461 per tonne from US$2,128.
The continuous surge in aluminium production in China and production recovery in the rest of the world along with flattish exchange inventories reflected a pick-up in demand, according to Lau. But margins are likely to be squeezed by an increase in fuel prices.
Lau said rising fuel costs, including coal prices and electricity prices, might add pressure on smelters' margins.
In order to produce impressive earnings this year, Chalco will have to secure lower electricity prices from power suppliers and hope for a stronger than expected rise in aluminium prices, Lau said.