Aluminium
The most commercially mined aluminium ore is bauxite, as it has the highest content of the base metal. The primary aluminium production process consists of three stages. First is mining of bauxite, followed by refining of bauxite to alumina and finally smelting of alumina to aluminium. 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%. Production of 1 tonne of aluminium requires 2 tonnes of alumina while production of 1 tonne of alumina requires 2 to 3 tonnes of bauxite.
The aluminium production process can be categorised into upstream and downstream activities. The upstream process involves mining and refining while the downstream process involves smelting and casting & fabricating. Downstream-fabricated products consist of rods, sheets, extrusions and foils.
Power is amongst the largest cost component in manufacturing of aluminium, as the production involves electrolysis. Consequently, manufacturers are located near cheap and abundant sources of electricity such as hydroelectric power plants. Alternatively, they could set up captive power plants, which is the pattern in India. Indian manufacturers are the lowest cost producers of the base metal due to access to captive power, cheap labour and proximity to abundant supply of raw material, i.e., bauxite.
The Indian aluminium sector is characterised by large integrated players like Hindalco and National Aluminium Company (Nalco). The other producers of primary aluminium include Indian Aluminium (Indal), now merged with Hindalco, Bharat Aluminium (Balco) and Madras Aluminium (Malco) the erstwhile PSUs, which have been acquired by Sterlite Industries. Consequently, there are only three main primary metal producers in the sector.
The per capita consumption of aluminium in India continues to remain abysmally low at under 1 kg as against nearly 25 to 30 kgs in the US and Europe, 15 kgs in Japan, 10 kgs in Taiwan and 3 kgs in China. The key consumer industries 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% to 12%). However, internationally, the pattern of consumption is in favour of transportation, primarily due to large-scale aluminium consumption by the aviation industry.
The metal has a long working life due to its propensity for recycling. Recycled metal requires significantly less amounts of energy for manufacturing of primary aluminium. Just to put things in perspective, the recycling of aluminium scrap requires 5% of the energy required for primary smelting, which is astoundingly lower, considering that power is such a high cost component.
Key Points
Supply Supply of aluminum is in excess and any deficit can be imported at low rates of duty. Currently, domestic production comfortably meets domestic requirements.
Demand Demand for aluminium is estimated to grow at 6%-8% per annum in view of the low per capita consumption in India. Also, demand for the metal is expected to pick up as the scenario improves for user industries, like power, infrastructure and transportation.
Barriers to entry Large economies of scale. Consequently, high capital costs.
Bargaining power of suppliers Most domestic players operate integrated plants. Bargaining power is limited in case of power purchase, as Government is the only supplier. However, increasing usage of captive power plants (CPP) will help to rationalise power costs to a certain extent in the long-term.
Bargaining power of customers Being a commodity, customers enjoy relatively high bargaining power, as prices are determined on demand and supply.
Competition Competition is primarily on quality and price, as being a commodity, differentiation is difficult. However, the recent spate of consolidation has reduced the competitive pressure in the industry. Further, increasing value addition to aluminium products has helped some companies protect themselves from the high volatilities witnessed in this industry.
Financial Year '07
Global production of primary aluminum rose from 30 million tons (MT) in 2004 to 32 MT in 2005, a jump of 6.9%. In 2006, it further increased to 34 MT, an increase of 6.3% YoY. North America, Western Europe and China together accounted for approximately 56% production, with China alone accounting for 26% of global primary aluminum production. Asia, once again showed the largest annual increases in consumption of primary aluminum, driven largely by increased industrial consumption in China, which has emerged as the largest aluminum consuming nation, accounting for 25% of global primary aluminum consumption in 2006. As far as global consumption is concerned, it increased by 5.6% in 2005 and touched 32 MT. In 2006, the corresponding figures were 8.2% and 34.7 MT.
The Indian aluminium industry grew by only 7% YoY during FY07, in quite contrast to the 20% YoY growth witnessed during FY06. This was mainly on account of subdued demand from the power sector, which grew by 7% as opposed to 23% growth in FY06. However, consumption of the metal continued to be strong in the transportation and construction sectors with growth rates in the region of 16% and 15% YoY respectively. As far as prices are concerned, they rose significantly in FY07, jumping by as much as 31% YoY. However, they are likely to soften going forward, on the backdrop of slowing global growth. Alumina prices corrected downwards because of surge in Chinese output. Rupee appreciation against the US dollar also had an impact on the realisations of domestic companies.
Prospects
Globally, newer packaging applications and increased usage in automobiles is expected to keep the demand growth for aluminium over 5% in the long-term. Asia will continue to be the high consumption growth area led by China, which has been and is expected to continue to register double-digit growth rates in aluminium consumption in the medium-term.
With key consuming industries forming part of the domestic core sector, the aluminium industry is sensitive to fluctuations in performance of the economy. Power, infrastructure and transportation account for almost 3/4th of domestic aluminium consumption. With the government focusing towards attaining GDP growth rates above 8%, the key consuming industries are likely to lead the way, which could positively impact aluminium consumption. Domestic demand growth is estimated to average in the region of over 8% over the longer-term.
Lowering of duties reduces the net tariff protection for domestic aluminium producers. Aluminum imports are currently subject to a customs duty of 5% and an additional surcharge of 3% of the customs duty. The customs duty has been reduced in a series of steps from 15% in 2003 to 5% in January 2007. With reduction in import duties, domestic realisation of aluminium majors, namely Hindalco and Nalco, is likely to be under pressure, as the buffer on international prices is reduced. Moreover, with greater linkage to international prices, volatility in financials could increase. However, producers are moving downstream to negate the higher volatility.
source: www.equitymaster.com
The most commercially mined aluminium ore is bauxite, as it has the highest content of the base metal. The primary aluminium production process consists of three stages. First is mining of bauxite, followed by refining of bauxite to alumina and finally smelting of alumina to aluminium. 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%. Production of 1 tonne of aluminium requires 2 tonnes of alumina while production of 1 tonne of alumina requires 2 to 3 tonnes of bauxite.
The aluminium production process can be categorised into upstream and downstream activities. The upstream process involves mining and refining while the downstream process involves smelting and casting & fabricating. Downstream-fabricated products consist of rods, sheets, extrusions and foils.
Power is amongst the largest cost component in manufacturing of aluminium, as the production involves electrolysis. Consequently, manufacturers are located near cheap and abundant sources of electricity such as hydroelectric power plants. Alternatively, they could set up captive power plants, which is the pattern in India. Indian manufacturers are the lowest cost producers of the base metal due to access to captive power, cheap labour and proximity to abundant supply of raw material, i.e., bauxite.
The Indian aluminium sector is characterised by large integrated players like Hindalco and National Aluminium Company (Nalco). The other producers of primary aluminium include Indian Aluminium (Indal), now merged with Hindalco, Bharat Aluminium (Balco) and Madras Aluminium (Malco) the erstwhile PSUs, which have been acquired by Sterlite Industries. Consequently, there are only three main primary metal producers in the sector.
The per capita consumption of aluminium in India continues to remain abysmally low at under 1 kg as against nearly 25 to 30 kgs in the US and Europe, 15 kgs in Japan, 10 kgs in Taiwan and 3 kgs in China. The key consumer industries 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% to 12%). However, internationally, the pattern of consumption is in favour of transportation, primarily due to large-scale aluminium consumption by the aviation industry.
The metal has a long working life due to its propensity for recycling. Recycled metal requires significantly less amounts of energy for manufacturing of primary aluminium. Just to put things in perspective, the recycling of aluminium scrap requires 5% of the energy required for primary smelting, which is astoundingly lower, considering that power is such a high cost component.
Key Points
Supply Supply of aluminum is in excess and any deficit can be imported at low rates of duty. Currently, domestic production comfortably meets domestic requirements.
Demand Demand for aluminium is estimated to grow at 6%-8% per annum in view of the low per capita consumption in India. Also, demand for the metal is expected to pick up as the scenario improves for user industries, like power, infrastructure and transportation.
Barriers to entry Large economies of scale. Consequently, high capital costs.
Bargaining power of suppliers Most domestic players operate integrated plants. Bargaining power is limited in case of power purchase, as Government is the only supplier. However, increasing usage of captive power plants (CPP) will help to rationalise power costs to a certain extent in the long-term.
Bargaining power of customers Being a commodity, customers enjoy relatively high bargaining power, as prices are determined on demand and supply.
Competition Competition is primarily on quality and price, as being a commodity, differentiation is difficult. However, the recent spate of consolidation has reduced the competitive pressure in the industry. Further, increasing value addition to aluminium products has helped some companies protect themselves from the high volatilities witnessed in this industry.
Financial Year '07
Global production of primary aluminum rose from 30 million tons (MT) in 2004 to 32 MT in 2005, a jump of 6.9%. In 2006, it further increased to 34 MT, an increase of 6.3% YoY. North America, Western Europe and China together accounted for approximately 56% production, with China alone accounting for 26% of global primary aluminum production. Asia, once again showed the largest annual increases in consumption of primary aluminum, driven largely by increased industrial consumption in China, which has emerged as the largest aluminum consuming nation, accounting for 25% of global primary aluminum consumption in 2006. As far as global consumption is concerned, it increased by 5.6% in 2005 and touched 32 MT. In 2006, the corresponding figures were 8.2% and 34.7 MT.
The Indian aluminium industry grew by only 7% YoY during FY07, in quite contrast to the 20% YoY growth witnessed during FY06. This was mainly on account of subdued demand from the power sector, which grew by 7% as opposed to 23% growth in FY06. However, consumption of the metal continued to be strong in the transportation and construction sectors with growth rates in the region of 16% and 15% YoY respectively. As far as prices are concerned, they rose significantly in FY07, jumping by as much as 31% YoY. However, they are likely to soften going forward, on the backdrop of slowing global growth. Alumina prices corrected downwards because of surge in Chinese output. Rupee appreciation against the US dollar also had an impact on the realisations of domestic companies.
Prospects
Globally, newer packaging applications and increased usage in automobiles is expected to keep the demand growth for aluminium over 5% in the long-term. Asia will continue to be the high consumption growth area led by China, which has been and is expected to continue to register double-digit growth rates in aluminium consumption in the medium-term.
With key consuming industries forming part of the domestic core sector, the aluminium industry is sensitive to fluctuations in performance of the economy. Power, infrastructure and transportation account for almost 3/4th of domestic aluminium consumption. With the government focusing towards attaining GDP growth rates above 8%, the key consuming industries are likely to lead the way, which could positively impact aluminium consumption. Domestic demand growth is estimated to average in the region of over 8% over the longer-term.
Lowering of duties reduces the net tariff protection for domestic aluminium producers. Aluminum imports are currently subject to a customs duty of 5% and an additional surcharge of 3% of the customs duty. The customs duty has been reduced in a series of steps from 15% in 2003 to 5% in January 2007. With reduction in import duties, domestic realisation of aluminium majors, namely Hindalco and Nalco, is likely to be under pressure, as the buffer on international prices is reduced. Moreover, with greater linkage to international prices, volatility in financials could increase. However, producers are moving downstream to negate the higher volatility.
source: www.equitymaster.com
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