Charting the Pathway Towards Excellence Charting the Pathway Towards Excellence Press Metal Aluminium Holdings Berhad 22 23 Integrated Annual Report 2023 THE MARKET WE OPERATE IN The global economic landscape in 2023 was marked by structural headwinds, with geopolitical instability and supply chain disruptions exacerbating existing post-pandemic challenges. This led to elevated raw material prices and persistently high inflation levels, creating a difficult environment for manufacturers around the world. This confluence of factors is reflected in subdued global economic growth. According to the International Monetary Fund’s World Economic Outlook, global real gross domestic product is expected to slow to 3.0% in 2023 from 3.5% in 2022, with advanced economies set to take the brunt of the slowdown. Against this backdrop, we have witnessed reduced demand for aluminium from traditional sectors such as construction and manufacturing. However, the rise of energy transition-related, green sectors like EV, solar power and energy transmission offered opportunities for sustainable growth. In addition, the structural changes brought about by the Russia-Ukraine war opened the door for us to strengthen our position in the western market, leveraging our status as a producer of low-carbon aluminium. Supporting our ambitions, we are leveraging strategic partnerships across the value chain, including that with Sumitomo Corporation and Glencore International AG, to secure some of our supply of raw materials and sales, while rigorously assessing risks through our well-established Enterprise Risk Management (“ERM”) process. Through these proactive moves, we are positioned to remain resilient during these challenging times and to emerge from the economic slowdown in a stronger and more competitive position. Aluminium Demand and Price Fluctuations Global Megatrend Aluminium prices on the LME fluctuated between USD2,068 and USD2,636 per tonne during 2023, failing to sustain momentum and tracking marginally downwards for most of the year. This downtrend was precipitated by two key factors. Firstly, China’s slower than expected recovery from the COVID-19 pandemic coupled with sluggish growth outside of China particularly Europe, resulted in reduced demand from traditional sectors such as real estate and construction. Secondly, many buyers engaged in destocking activities during the year, influenced by higher interest and holding cost. On a brighter note, the rise of green sectors which is primarily driven by Chinese manufacturers, offset a significant portion of the decline in demand during the year, preventing prices from dropping lower. Meanwhile, the announcement by the US Federal Reserve in December 2023 that it would not undertake further interest rate hikes has prompted a more optimistic global economic outlook, leading to a surge in LME prices from USD2,147 in early December to USD2,335 per tonne as the year closed. Impact on Business Operations • Our profitability is impacted by movements in the price of aluminium, which in turn depend on various external factors including geopolitical instability, energy prices, economic performance, inflation and green infrastructure adoption. • By continually diversifying our sources of income through the provision of VAPs and leveraging on opportunities in green industries, we can mitigate the impact of these macroeconomic trends on our overall performance. • In FYE2023, we attained revenue of RM13.8 billion, a 12.0% declined compared to FYE2022, and PATAMI of RM1.2 billion. Outlook for 2024 We anticipate that the global economy will gradually recover, bolstered by the anticipated pause in US rate hikes and expected rate cuts. However, the aluminium industry may continue to be affected by the considerable macroeconomic headwinds, which will continue to depress growth in the building and construction sector. On a positive note, increasing demand for aluminium from green industries offers a more positive outlook for the industry, with the EV, solar and energy transmission sectors showing considerable growth potential. This positive trend is further accelerated by the ongoing shift of manufacturing operations to the ASEAN region, which should drive demand for local and regional sources of aluminium and other inputs. Consequently, we anticipate a gradual increase in aluminium prices in the coming years, while maintaining a cautiously optimistic outlook until the world economy shows clear signs of sustained recovery. This is substantiated by research from Bloomberg Intelligence, which expects aluminium demand to grow by 3% and 2% in 2024 and 2025, respectively1. Supply Chain Global Megatrend Supply chain disruptions have been a persistent factor affecting the global economy over the past four (4) years. The challenge began with the COVID-19 pandemic and its lockdowns, which caused major labour shortages, heightened freight costs and significant delivery delays. The Russia-Ukraine conflict and China’s zero-COVID policy then further complicated the situation, affecting supply in sectors including consumer goods, metals, food, chemicals and other commodities. With China’s relaxation of its COVID-19 restrictions, S&P Global Market Intelligence remarked that conditions have largely returned to normal. However, the agency also stated that uncertainties remain for government policy and physical risk. The ongoing conflict in Ukraine, in particular, may continue to create supply chain challenges in the near future due to sanctions against the current Russian administration and new European Union (“EU”) regulations on exports2. Impact on Business Operations • Disruptions in the supply of raw materials and logistics challenges, both locally and globally, could affect our business operations, potentially resulting in transit delays, inventory shortages and disruptions to manufacturing processes, thereby impacting our efficiency. • Supply chain disruptions may also lead to increased freight expenses, higher inventory costs and extended turnover days which may, in turn, have implications on our operating costs and profitability. Outlook for 2024 Looking forward, the trend of protectionism amongst governments is a cause for concern as this may affect the stability of global supply chains and the ability of manufacturers to secure inputs and access export markets. In Indonesia, for instance, the government announced a ban on bauxite exports beginning of 2023, aimed at shoring up the country’s domestic refineries3. As Indonesia represents 6% of global bauxite production, the ban impacted alumina refineries in other countries that source bauxite from them. From our standpoint, such protectionist actions create a stronger case for securing a portion of our alumina inputs, which we are doing via our upstream investment in PT Bintan Alumina Indonesia. Meanwhile, the occurrences of extreme weather event, which are becoming increasingly frequent, pose an additional challenge to the global aluminium supply intermittently, particularly to some aluminium smelters in China. As a globalised market player, we will stay attuned to this evolving landscape and strategically planning our resources and product allocation accordingly. The Market We Operate In
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