Production of aluminium in India
Growth potential in India
India has the fifth largest bauxite reserves with deposits of about 3 bn tonnes or 5% of world deposits. India’s share in world aluminium capacity rests at about 3%. The per capita consumption of aluminium in India continues to remain abysmally low at under 1 kg as against nearly 25-30 kgs in the US and Europe, 15 kgs in Japan, 10 kgs in Taiwan and 3 kgs in China, which implies significant potential for the sector. The key consumer industries for aluminium in India are power, transportation, consumer durables, packaging and construction. Of this, power is the biggest consumer (about 44% of total) followed by infrastructure (17%) and transportation (about 10%-12%).
Key Positives
Growth potential:
The per capita aluminium consumption in India is less than 1 kg compared to about 3 kgs in China and 30 kgs in the US. The fact that almost 44% of the domestic aluminium is consumed by the electrical sector and there are only about 300 applications for the metal in India leaves a lot of room for the domestic sector to grow. Just to put things in perspective, aluminium usage on the global front is tilted towards transportation and packaging sectors and there are an estimated 3,000 applications for the metal.
The India advantage:
Indian aluminium companies are amongst the lowest cost producers of the metal in the world, which is a significant advantage, especially during times of cyclical downturns. Abundant bauxite reserves and access to cheap labour have given the domestic aluminium manufacturers an edge over their international peers.
Key Negatives
High dependence on power sector:
The electrical sector consumes a major chunk of the total cost of domestic aluminium production. But considering the sticky positions of the State Electricity Boards (SEBs) and uncertainties raised with respect to the smooth implementation of the Electricity Act 2003, the growth in the power sector is likely to be slow.
Waning tariff protection:
The consistent decline in import duties reduces the net tariff protection for aluminum producers making them vulnerable to cheap imports, which could be detrimental to their financial health, especially during times of cyclical downturns.
The China factor:
Strong demand for the metal from China and simultaneous improvement in economies like the US and other Asian economies led to the strength in global aluminium prices. However, the all time high aluminium prices have started witnessing pressure as the industry is expected to witness excess supply of 0.562 MT in 2007 as compared to 0.287 MT supply shortage in 2006. Chinese aluminium supply is exceeding demand growth. Surplus is being exported in the form of semis leading to surplus situation in the global aluminium markets, which will ultimately lead to softening of prices.
India is considered to be the fifth largest producer of Aluminium in the world. It accounts to around 5% of the total deposits and produces about 0.8 million tons of aluminium. It is estimated that if the country’s aluminium consumption rate maintains, it’d be having the reserves for over 350 years. Most of the bauxite mines lie in Bihar, Karnataka and Orissa.
In India, the production of aluminium is highly concentrated and is in the hands of the following four companies:
- Bharat Aluminium Co. Ltd (BALCO)
- National Aluminium Co. Ltd (NALCO)
- Hindustan Aluminium Co. Ltd (HINDALCO)
- Madras Aluminium Co. Ltd (MALCO)
BALCO and NALCO represent the public sector and HINDALCO and MALCO represent the private sector of the country. Earlier a company named INDAL was also indulged in the production of aluminium independently but in year 2000, it was taken over by HINDALCO and now it works as a subsidiary of the parent company.
Salient features of Indian Aluminium Industry
- Highly concentrated industry with only five primary plants in the country.
- Controlled by two private groups and one public sector unit.
- Bayer-Hall-Heroult technology used by all producers.
- Electricity, coal and furnace oil are primary energy inputs.
- All plants have their own captive power units for cheaper and un-interrupted power supply.
- Energy cost is 40% of manufacturing cost for metal and 30% for rolled products.
- Plants have set internal target of 1 – 2% reduction in specific energy consumption in the next 5 – 8 years.
- Energy management is a critical focus in all the plants.
- Two plants have declared formal energy policy.
- Each plant has an Energy Management Cell.
- Achievements in energy conservation are highlighted in the Annual Report of the company.
- Energy targets are based on best energy figures achieved in their sector / region and by the plant itself in the past.
- Generally, government policies were rated as conducive to energy management.
- ‘Task Force’ formed by BEE in this sector to work as catalyst in promoting energy efficiency.
- High cost of technology is the main barrier in achieving high energy efficiency.
Indian aluminium market
Indian market for aluminium has expanded since a few years and is directing towards further growth in coming years. Both public and the private sector are indulged in the production of alumina and aluminium. With the change in time, Indian aluminium sector has observed drastic changes. Earlier government played an important role in fixing the regulations in trading of aluminium as it had the monopoly in the production of the metal but currently it has lost its control over the price and distribution due to the emergence of private sector. Indian production figure for this metal is around 0.8 million tons in a year. That makes it the fifth largest producer of aluminium in the world. India has 5% of the total bauxite deposits in the world that can last for approximately 350 years with the present consumption rate. The consumption of this metal is also on a rising trend with a figure of around 0.618 million tons which is expected to touch 0.78 million tons mark in 2007.
In early 1990s when the Indian economy was liberalized, India identified its export potential and emerged out to be a net exporter of Aluminium. Till now it has been an exporter of this metal, though Indian scenario hasn’t been a self-dependent one. Indian exports figures hovers around 82000 tons annually and the major importer countries of Indian aluminium are:
i. Bangladesh
ii. Sri Lanka
iii. Egypt
iv. Iraq
Market influencing factors
- Domestic demand and supply.
- International prices.
- Interference of government and various associations.
- Import duties.
- Other economic activities in the world.
- Price fluctuations of the input materials like power, freight etc.
- Changes in inventory stocks at LME, SHFE and TOCOM warehouses.
- World aluminium mine production through exploration of new mines and expansion of existing mines.
- Economic growth of major consuming nations such as China, Japan, Germany etc.
- Growth and demand in the construction, packaging and transportation industry.
Aluminum to Beat Copper as Takeovers Squeeze Supply
Porters carry a sheet of aluminum
Aluminium, the worst performer on the London Metal Exchange since 2002, has the best chance to advance for at least the next six months. A growing number of investors say takeovers of Alcan Inc. of Canada and Russia’s OAO Sual Group may reduce aluminium production as China, the world’s largest supplier, cuts exports. Aluminium will be the only metal on the LME to gain for the rest of 2007, while copper, nickel, zinc and tin decline, futures markets show.
United Co. Rusal, the Russian aluminium company controlled by billionaire Oleg Deripaska, expects the metal to appreciate 50 percent to $4,000 a metric ton as early as next year. Prices will probably rise through 2010, say Deutsche Bank AG, UBS AG and JPMorgan Chase & Co., increasing profit for miners BHP Billiton Ltd. and Alcoa Inc. and hurting consumers, such as Boeing Co. and bottlers for Coca-Cola Co.
“Aluminium futures are the best place to park your money,” says Jon Bergtheil, head of global metals strategy at JPMorgan in London. “Copper and nickel have more downside potential than aluminium.” Aluminium for immediate delivery in the so-called cash market is selling for $2,675.80 a metric ton, and futures contracts indicate that prices will reach $2,756 in February. Copper, now at $7,678 a ton, will decline to about $7,350 while nickel will slide from $36,315 to $35,420 on the LME.
Benchmark aluminium for delivery in three months on the LME was at $2,732 a ton as of 9 a.m. London time today.
Rising energy costs threaten to drive up prices because aluminium production consumes 15 megawatts of power for each ton, equal to 370 euros ($501) for the typical smelter plant in Germany. Power to be delivered in 2010 now sells for 55 euros a megawatt-hour, or 825 euros a ton of aluminium, according to prices from broker GFI. Metals prices will keep pace or manufacturers may shut smelters to save money.
“There hasn’t been investment in the industry over the past two decades, and the world will pay the price for that,” says Jim Rogers, the chairman of New York-based Beeland Interests Inc. and author of “Hot Commodities.” “It has much higher energy costs compared with the other base metals, and as plants are taken off stream because of rising costs, we will see a tightening in supply.”
Aluminium also is buoyed by the prospect of the biggest producers wielding more power than OPEC does in the oil market.
Alcoa’s hostile $28 billion bid for Alcan may result in the world’s five largest aluminium producers controlling 54 percent of world supply, compared with 43 percent a year ago. By comparison, the 12-member Organization of Petroleum Exporting Countries pumps 41 percent of the world’s oil.
Alcoa, Rusal, BHP Billiton and the rest of the industry sell about $85 billion of aluminium a year to makers of beer cans, airplanes, window frames and car parts. Higher prices may hurt profits at companies ranging from Pepsi-Cola Bottling Co. to Airbus SAS to Ford Motor Co.
“Alcoa and Alcan getting together, that’s probably the key issue for the commodity right now,” says Tom Williams, the head of purchasing for Airbus in Toulouse, France. “We want to be sure that whatever happens we still end up with a sensible competitive environment at the end of it.” The average airplane is 80 percent aluminium.
Alcoa wants Montreal-based Alcan so it can expand capacity to meet a doubling of demand by 2020, according to spokesman Kevin Lowery. This year, production will outstrip demand by 576,000 tons, according to CRU, a London-based metals consultant.
`Bring Strength’
The takeover “will bring the strength of two companies to bear to make sure we can elevate what we do for our customers,” says Lowery. Alcoa, based in New York, is prepared to sell assets to resolve antitrust issues, he said.
Aluminium is cheap relative to every other metal on the LME, the result of production in China. The metal has increased on average 14 percent a year for the past five years, compared with 26 percent for tin and 42 percent for lead.
The price of aluminium will rise next year to $3,086 a ton, or $1.40 a pound, up from an earlier forecast of $1.30 a pound, according to Dan Brebner at UBS in London, because of raw material and energy costs. Aluminium has averaged $2,774 a ton so far this year.
“In 2008, it looks like aluminium could outperform the other metals,” says Brebner, executive director of commodities research. `Significant’ Positions
China’s decision on June 19 to rein in production by removing a tax rebate on shipments of aluminium rods and bars may result in the country importing more aluminium than it exports by 2009, said Michael Widmer, head of metals research at Calyon in London.
“That should be a big support for prices,” he said.
Demand for aluminium in China, which is also the world’s largest consumer of the metal, will grow 20 percent this year, outstripping the rise in domestic production, Deutsche Bank AG said in a June 22 report. Investors who followed Deutsche Bank’s advice to buy aluminium in April 2005 earned a 49 percent profit in 16 months.
The average person in China uses 10 kilograms of aluminium a year, and the average Russian 5 kilograms, compared with 34 for the typical American and more than 50 for a German, according to Rusal estimates.
Forward Buying
Charts tracking aluminium for delivery 63 months from now show the greatest demand after 2008. The price for the December 2010 contract gained 9.5 percent to $2,410 a ton as of June 22, while the most widely traded three-month contract has lost 1.8 percent during the same period. “The far forward fund buying is significant,” says Mo Ahmadzadeh, president of metals trading at Mitsui Bussan Commodities in New York. Rusal, created this year through the merger of OAO Russian Aluminium, OAO Sual Group and the alumina unit of Glencore International AG, is anticipating a surge in demand. The company plans to expand three plants and build two more as soon as 2012.
Chief Executive Officer Alexander Bulygin said in March that aluminium may reach $4,000 a ton as early as next year.
Aluminium has a “very favorable long-term outlook,” Artem Volynets, Rusal’s head of strategy, said in a June 29 interview in which he declined to give a specific forecast. “We expect to see a very interesting picture when China shifts into the importer position.”
Prices also are helped by a slowdown in smelter construction. Aluminium Corp. of Bahrain is facing a natural gas shortage that may scuttle a plan to increase annual capacity to 1.2 million tons. Alba, as the company is known, is trying to buy gas from Qatar to supply its factory.
“If you look past the next five years, some people see very little downside because they believe there will be less supply and the cost of producing this commodity will only go up,” says Adam Rowley, an analyst at Macquarie Bank Ltd. in London. Increasing energy demand worldwide means “there is less need to sell it cheaply to smelters.”
OUTLOOK
Aluminium is cheap relative to every other metal on the LME, the result of production in China. The metal has increased on average 14 percent a year for the past five years, compared with 26 percent for tin and 42 percent for lead.
On the positive side,
§ Takeovers of Alcan Inc. of Canada and Russia’s OAO Sual Group may reduce Aluminium production as China, the world’s largest supplier, cuts exports.
§ Demand for aluminium in China, which is also the world’s largest consumer of the metal, is expected to grow 20 percent this year, outstripping the rise in domestic production. The average person in China uses 10 kilograms of aluminium a year, and the average Russian 5 kilograms, compared with 34 for the typical American and more than 50 for a German.
§ Rising energy costs threaten to drive up prices because Aluminium production consumes 15 megawatts of power for each tonne, equal to 370 Euros ($501) for the typical smelter plant in Germany.
§ China’s decision on June 19 to rein in production by removing a tax rebate on shipments of aluminium rods and bars may result in the country importing more aluminium than it exports by 2009.
§ Prices also are helped by a slowdown in smelter construction.
On the negative side,
§ Economic slowdown in the US, world largest economy is declining the demand of Aluminum. Automotive demand, the biggest market for Aluminum. It is highly used in housing sector. Slump in housing and manufacturing sector in US is giving negative pressure on Aluminum prices.
§ Crude Oil prices are near record highs in real terms and threatening economic growth. Crude Oil is expected to reach the level of $78-$80, this year. Hike in Crude Oil, generally, halt the economic activities in the economy, as it increase the inflationary pressure in the economy.
§ Hefty stocks at London Metal Exchange (LME) warehouse. In general, investors track the trend of LME while trading in Base Metals. Depleting stocks in warehouse is considered as a bullish sign for any Metals and vice versa. All Base Metals have seen heavy decline in stock position in LME. Some of them still gaining momentum in the market on continued decline in inventory position. But, in case of Aluminium, it has witnessed rise in the stock position, which is compelling it to trade with bearish sentiments.
Aluminium prices are likely to remain weak in the near-term, and they are likely to settle at $2,600 a tonne
