Market Survey

8 FACTS FOR YOU • MAY 2012

By: Dr I. Satya SunDaram

Aluminium: On A ROlleR-COAsteR Ride From enjoying great profits through the boom year of 2008, the aluminium industry in india now faces a drop in prices, uncertain power supplies and a host of other problems.

producers are Bharat Aluminium Co. Ltd (Balco) and Madras Alumin-ium Co. Ltd (Malco).

Power constitutes 40 to 50 per cent of the cost of producing the metal, depending on energy costs and smelter efficiency. India owns the world’s fifth largest bauxite deposits, most of which yield high-quality minerals.

Indian companies such as Hin-dalco, state-owned Nalco and Ve-danta-controlled Balco are relatively low-cost aluminium producers.

Recent trends

Aluminium firms have entered the power sector with a view to re-ducing losses. They want to be inde-pendent power producers and hence are in search of cheap power sources. Also, there is a realisation that new smelters should be built only when there is an allotment of coal blocks.

Nearly 15 per cent of the alu-minium utensils manufactured in the country are exported to West Asia, Europe and Africa. The Rs 32,000-million aluminium utensils industry, comprising over 4000 firms, is set to witness growth of 15 to 20 per cent in the next two years, main-ly because of the high resale value of aluminium products. This sector has recorded an average growth of 15 per

india’s aluminium industry is well placed to explore new application areas and un-tapped demand potential. In future, there may be greater

preference for aluminium. India’s per capita consumption of alumini-um of 1 kg is very low compared to the 13 kg per capita in the developed world.

In India, the aluminium indus-try is ideally structured as all the

smelters here source alumina, the intermediate input, from their own refineries, backed by bauxite mines. In other countries, smelters are not so well placed as alumina spot prices are rising.

The National Aluminium Co. Ltd (Nalco) and the Hindustan Alumini-um Co. Ltd (Hindalco) enjoy the ben-efit of highly cost-effective coal-fired captive power complexes virtually on the pitheads. The other prominent

Market Survey

MAY 2012 • FACTS FOR YOU 9

cent in the last three years in spite of the economic slowdown. The utensils segment accounts for 20 per cent of overall aluminium consumption.

However, the Rs 500,000-million stainless steel industry has also been growing at 15 per cent for the last several years. It needs to be noted that stainless steel utensil scrap is generally dumped for no value, while the aluminium utensils scrap is kept safe to be resold back to local retail-ers at a slight discount compared to the cost of new utensils.

The automobile industry is do-ing well in Europe, China, India and many other countries. This ensures good demand for aluminium. Cars are using more and more aluminium in components and in their body, for weight reduction and fuel economy. In Asia, construction and power sec-tors are the major users of alumin-ium.

Experts say that the world will face an aluminium deficit of 600,000 tonnes in 2012. The situation may further worsen if China decides to go ahead in scrapping high-cost smelt-ers because of the fall in aluminium prices. The Chinese industry is im-port-dependent for its raw materi-als. It is also facing a rising energy bill.

Hindalco

Hindalco, the flagship company of the Aditya Birla group, is making satisfactory progress. All its projects are on track. All the new smelters of Hindalco will each have a capacity of 360,000 tonnes.

The company, which is the coun-try’s largest aluminium producer, has received the final environment clearance for its proposed 1.5 mil-lion-tonne, Rs 60,000-million alu-mina refinery project in Orissa’s Rayagada district. This is slated to be commissioned by the end of 2014. This is the second leg of the project. The first stage of the project has an

aluminium smelter plant in Orissa. The Aditya Project has an alu-

minium smelter plant with a capac-ity of 359 kilo tonnes per annum (ktpa), with a 900MW power pro-ject for its captive use. The project is expected to be commissioned by the end of 2012 and has received the necessary approvals. The total cost is Rs 92,000 million, excluding the financing charges.

nalco

On completion of its second phase of expansion in 2010, Nalco had smelting capacity of 460,000 tonnes at Angul (Orissa), to be further raised to 570,000 tonnes. The company plans to build a 500,000-tonne smelter at a new site in Orissa.

Nalco has a 1200MW power complex as captive back-up for the Angula smelter. For an aluminium

maker, success is underpinned by a smelter’s ability to source power cheaply. Nalco has been producing coal-fired electricity cost-effectively for over 25 years.

Nalco added 525,000 tonnes of alumina refining capacity in Sep-tember 2011, which has increased its total alumina capacity to 2.1 million tonnes a year. However, aluminium capacity continues to remain at 0.46 million tonne a year. The company plans to increase its aluminium pro-duction capacity in India and Indo-nesia, besides its diversification into nuclear power, though the latter will not be happening soon. Nalco is ex-pected to increase bauxite mining from 6.3 million tonnes to 6.8 mil-lion tonnes a year by July 2012. The Utkal Coal Block (70 million tonnes a year) will yield returns only in 2012-14.

The shutdown pots of Nalco’s smelter plant will be reactivated shortly, once the coal supply to the company’s captive power plant improves. However, in spite of the closure of 60 pots (out of 930), alu-minium production has not been affected. The reason is that with better voltage, fewer pots are pro-ducing the same quantity of alu-minium. However, during 2010-11, power and fuel alone constituted 39 per cent of the company’s total ex-penditure.

Nalco’s margins are under pres-sure. Its stock has lost over half its value between March and Decem-

ber 2011 on account of de-clining aluminium prices, global uncertainty, and weak performance. Rising production costs due to high raw material prices have adversely affected the company’s profits. Its oper-ating margin was a low 9.5 per cent in the September 2011 quarter. Coal contin-ues to be a cause for con-cern.

Table I

aluminium Production in India

(tonnes)

Year Production

2003-04 817,2882004-05 882,2532005-06 951,2052006-07 1,152,5302007-08 1,339,3302012-13* 4,400,000

*Target

Table II

aluminium Output of major Players(tonnes)

Company 2008-09 2012-13

Hindalco Industries 488,000 1,138,000Nalco 403,000 1,000,000Vedanta Resources** 638,000 2,000,000Others 200,000 300,000

*Estimates **Includes subsidiaries like Balco, Malco and Vedanta Aluminium

Market Survey

10 FACTS FOR YOU • MAY 2012

Aluminium pricesAluminium prices have been fluc-

tuating. At the peak of global eco-nomic activity, prices of the metal had reached an all-time high of $3400 a tonne in 2008, which dropped 47 per cent to reach $1800 a tonne in August 2009. However, by October 2010, prices were hovering around $2400 a tonne.

In the first nine months of 2011, aluminium sold at average prices of $2498 a tonne—18 per cent up on a year-to-year basis. The average alu-minium price for 2011-12 is estimated at $2310 a tonne. For 2012-13, it is expected at around $2250. In rupee terms, aluminium prices could average Rs 95 per kg in the first half of 2012.

A few challenges

The expansion projects are sub-ject to execution risks, given their

scale, their ‘greenfield’ nature and regulatory risks with regard to min-ing approvals. These could delay some of the projects or postpone them indefinitely.

In September and October 2011, Nalco experienced a shortage of coal. Though coal supplies may have improved now, supplies within the country still remain limited. Coal India is likely to bear the incremen-tal profit-sharing costs as deter-mined by the proposed Mining Bill, which could raise linkage coal costs by around 8 per cent a tonne. Also, other raw materials have been con-tracted at high prices, the impact of which will be felt in 2012.

Annually, India imports 100 mil-lion tonnes of coal at a cost of around $10 billion. Moreover, imported coal commands a premium of up to 40 per cent over local prices.

In February 2012, aluminium prices at the London Metal Ex-

change (LME) hovered around $2100 per tonne. The cost of produc-ing aluminium has been on the rise, while the selling price for the metal has been declining constantly. At the current rate of $2026 per tonne for aluminium, nearly 50 per cent of the smelters in the world are incurring cash losses.

Rising inventories, coupled with a comfortable supply side scenario, are expected to act as a negative factor for the industry in 2012. The positive factors are the improve-ments in the US economy, and the expected decline in interest rates in China. We have to correct the cost-price imbalance for aluminium com-panies to become financially viable. Also, growth in the power sector is crucial for the healthy growth of aluminium units.

The author is an economist and a writer