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  >>  SECTOR INFO  >>  JULY 13, 2009

 
Aluminiu [Key Points | Financial Year '09 | Prospects | Sector Do's

m
and dont's]

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 space.

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
Large economies of scale. Consequently, high capital costs.
entry

Bargaining
Most domestic players operate integrated plants. Bargaining
power of
suppliers 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
Being a commodity, customers enjoy relatively high bargaining
power of
customers 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.
TOP
 Financial Year '09
Global production of primary aluminium rose continuously from 32 million tonnes
(MT) in 2005 to 38 MT in 2007, registering a CAGR of 9%. However, during 2008
the production remained flattish at around 38 MT (2007 levels) on account of
significant fall in demand in the second half of the year due to the global credit
crisis. This created a large amount of demand supply gap, thus making the
inventory levels at LME reach their multi year highs. China accounted for around
30% of the total global aluminium production. Asia, once again showed the
largest annual increase in consumption of primary aluminum, driven largely by
increased industrial consumption in China, which has emerged as the largest
aluminum consuming nation, accounting for 35% of global primary aluminum
consumption in 2008. As far as the global consumption goes, it declined by
around 3%YoY to 37 MT in 2008.

The Indian aluminium industry registered a growth of around 9% in FY09. Strong

growth in industrial, infrastructure, automobile, transportation and power sectors
during the first half of the fiscal were the key drivers for the demand. However,
realizations for the fiscal fell significantly on account of fall in LME prices due to
the global credit crisis, thus causing a dent in margins. On the other hand, the
 steep depreciation of Indian rupee against the US dollar impacted the industry
positively. The total aluminium production in the country stood at around 1.35 m
tonnes in FY09.
TOP
 Prospects
Globally, the demand for aluminium is projected to fall by around 7% in 2009 on
account of subdued conditions in the key user industries. However, China is
projected to maintain the consumption levels of 2008 mainly due to the fiscal
stimulus package that is likely to support its ailing economic growth. The revival in
the demand for the metal is expected to start from 2010 globally. As per Alcoa,
world’s largest aluminium producer, the demand for aluminium is projected to
grow at around 6% CAGR till 2018 on account of newer packaging applications
and increased usage in automobiles, consumer durables, construction and
defense.

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 bringing back
GDP growth rates of above 8%, the key consuming industries are likely to lead
the way, which could positively impact aluminium consumption. Domestic
demand growth is likely to remain robust over a long term period.

In order to protect the domestic industry, the government has imposed up to 30%
safeguard duty on import of aluminium products from China. Imports of aluminium
flat sheets used by sectors like auto and construction are imposed a duty of 12%
to 14% while import of aluminium foils, mainly used by the packaging industry
attracts around 25% to 30% duty. This duty is imposed for a period of two years
starting March 2009.
India is endowed with mineral resources. Bauxite reserves are basically available in the states like
Orissa, Andhra Pradesh, Madhya Pradesh, Gujarat, Maharashtra and Bihar. Minerals and metals rich
India has the fifth largest bauxite reserves in the world. About 89 per cent of the recoverable reserves of
bauxite in India are of metallurgical grade. Bauxite is converted to alumina in alumina refineries and
through a smelting process aluminium metal is extracted. Aluminium – indispensable and widely used
was often called the common man’s metal. This was due to the cheap availability of abundant bauxite
reserves in India where raw material accounted for 35 per cent of the cost of production. The aluminium
industry that emerged in India in early 1940s, over the years has remarkably grown. Its production has
progressively gone up in the public as well as the private sector.

The Major Players

The Indian aluminium industry is dominated by four or five companies that constitute the majority of India's aluminium
production. Following are the major players in the Indian aluminium industry:

 Hindustan Aluminium Company (HINDALCO)

 National Aluminium Company (NALCO)
 Bharat Aluminium Company (BALCO)
 MALCO
 INDAL
HINDALCO: Hindalco is the biggest player in the aluminium industry in India with around 39% of market share. An
Aditya Birla Group flagship company, Hindalco has its aluminium plant at Renukoot in Uttar Pradesh. It has various
aluminium products with a market share of 42% in primary aluminium, 20% in extrusions 63% in rolled products, 31%
in wheels and 44% in foils.

Sterlite Industries: The aluminium business of Sterlite Industries Limited comprises of two Indian aluminium giants –
BALCO and MALCO. While BALCO is a partially integrated, MALCO is a fully integrated producer of aluminium.
Sterlite has got a market share of around 32%.

NALCO: It is also one of the leading aluminium producers in India. Government of India has a stake of 87.15% in this
company. Its aluminium refinery is located at Damanjodi. It also has a smelter located at Angul, Orissa. Currently,
NALCO is concentrating on a capex programme to increase its production from 345,000 tonnes to 460,000 tonnes.