Falling Fowl - HY borrowers impacted by the Guinea coup

Rubi Gjika

7 September 2021•4 min read

If last year’s word of the year was “unprecedented”, then in 2021 that accolade surely goes to “transitory”. Explosive global pent-up demand released as lockdown restrictions eased into the summer has wreaked havoc on supply chains that are struggling to keep pace, pushing prices of commodities to multi-year records. But many are debating whether the inflationary effects will be transitory, or whether they will linger around for longer and force central banks to raise base rates much sooner than is currently being signalled.

However, one commodity story this week we’ve been keeping an eye on is separate from the robust demand, focussed instead on civil unrest in a West-African country.

Aluminium prices this week soared to their highest levels since May 2011 after news of a special forces-led coup in Guinea emerged, raising concerns about severe disruption in bauxite supply. The country is the world’s largest producer of bauxite, the primary source of aluminium, exporting 66.2 million tonnes during 2020.

A rising Aluminum price trend was already noticeable in the past year, so the latest increase shouldn’t be too surprising for those sourcing it as a raw material. But the market seems mainly concerned over potential Aluminium supply cuts from China, the world’s largest aluminium producer, which reportedly sources 55% of bauxite from Guinea.

According to an Australian Government report, global bauxite and aluminium consumption rose by 3% and 1.4% respectively in 2020, the latter being driven by an 11% increase in China alone. On the supply side, the production ramp-up in China and recovery to full capacity of Brazil’s Alunorte refinery pushed global aluminium output up by 2.7% compared to 2019.

Among base metal exporters, aluminium exporters had the second highest concentration, after copper exporters, with a 15% median market share and a maximum share of 48% for Guinea (Source: MetalCorp Group OM).

In the European high yield space, unsurprisingly, metal-heavy packaging businesses and to some extent, manufacturing companies which heavily rely on aluminium in production, could be hit by supply disruptions and/or hikes in input costs. Exposure is typically hedged by using pass-through customer contract provisions and commodity LME swaps, some of which are subject to time lags.

Our 9fin document search identified a number of high yield issuers with significant exposure to aluminium price and supply volatility which we think investors should be cautious of.

We have summarised some key names below:

Industrials

Greek industrial conglomerate Mytilineos manufactures aluminium and bauxite through a vertically integrated business model. Besides its bauxite mines located in Greece contributing ~30% of total supply for their alumina refineries, the company sources the remainder from third parties in other countries including Guinea. Metallurgy as a segment made up for ~31% of its revenues for the latest six months. Their most recent Q2 2021 report notes production costs for Alumina and Primary Cast Aluminium increased by 25% and 15% respectively during the quarter, but without any material impact on margins partially due to a rise in aluminium premiums by 30%.

Dutch issuer Metalcorp Group provides services in the steel & non-ferrous metals sector and also produces second-hand aluminium slabs. Its aluminium segment contributed roughly 27% of FY 2020 sales. The business unit focuses on bauxite mining in Guinea and aluminium scrap recycling in Germany. Regarding bauxite in particular, MetalCorp operates two mines in Guinea. Per their OM, at the SBG mine, which became operational only in late 2020, it holds reserves of more than 354mt, with a concession of 502 sq km for 25 years and 10 years in addition. The other, TML, plans to start production this year.

Dutch aluminium-based products manufacturer Constellium also notes its reliance on aluminium production sourced through a limited number of suppliers. Supply chain disruptions which also impact Crown Holdings (discussed later) seem probable, given that Crown is part of its customer base per their latest OM.

Packaging

Polish manufacturer Canpack makes, among other products, aluminium cans and metal closures. As mentioned in their Q1 2021 report, raw material costs have increased largely due to aluminium prices rising by 30%. According to their latest OM, Canpack sources aluminium from ten global suppliers.

Crown Holdings’ packaging spin off and recent LBO Titan is another issuer for which we’ve highlighted the risk of volatility in raw materials. While tinplate steel represented ~80% of its cost base, aluminium made up for a modest 5% of metal purchases per their latest OM.

Ardagh Metal Packaging, spin-off of Ardagh which merged with SPAC Gores Holdings, produces metal beverage packaging (51% of FY20 sales). Our Credit Quicktake highlights input availability as a key risk due to its heavy dependence on aluminium imports to the United States. The company recently reported that over 95% of its metal raw material costs relate to aluminium for fiscal year 2020.

We’ll be keeping an eye out for more developments on the story, and send updates with any other issuers we find that could be materially affected.