Reduction in import duty of aluminium and aluminum based products to 15% from 25%. The import duty on aluminum ore has remained untouched.
Budget Impact
The announcement is diagonally opposite to what the industry had wished. The expectation was for the Finance minister to leave import duties untouched for aluminium and downstream products. The argument was based on the fact that import duty in the Asean region is lower due to lack of significant smelting capacity. The lowering of duties reduces the net tariff protection for domestic aluminium producers to 10% from 20% earlier. The aluminium consuming industries seem to have held greater sway on the FM's decision. The key consuming industries are power & transportation, both critical components of product prices.
With reduction in import duties, domestic realization of aluminium majors, namely Hindalco, Nalco and Indal, is likely to be under pressure, as the buffer on international prices is reduced. Domestic sales of Hindalco, Nalco and Indal constituted 85%, 45% and 74% respectively of total sales. With greater linkage to international prices, volatility in financials could increase. Producers could move downstream to negate the higher volatility.
Industry wish list
Post September 11, the aluminium industry, globally, has been among the sectors considerably affected. Consequently, prices of the base metal have declined. The industry is asking for lower excise duty to perk up domestic demand.
Currently, aluminium producers enjoy a net tariff protection of 20%. Import duties on Aluminium products is 25%. The Government has indicated its intentions of reducing the maximum import duty to 20%. The industry believes that lower duty in the Asean region is due to lack of significant smelting capacity. Consequently, the Government, keeping these facts in mind, should not reduce tariffs. Also, net tariff protection for copper is 30%.
Key Positives
Over the past two years, mergers & acquisitions have led to three main groups in the aluminium industry A.V. Birla, Sterlite and Nalco. Consolidation in the domestic market is likely to augur well for the industry. With lesser competition companies could assert greater control over pricing. Consequently, domestic prices could take longer to adjust to any adverse movements on the LME. Nalco is scheduled for disinvestment in FY03.
After the lows, post September 11, aluminium prices on the LME have registered a smart rally. This seems to indicate resurgence in global demand for aluminium led by demand from China.
With key consuming industries forming part of the domestic core sector the aluminium industry is sensitive to fluctuations in performance of the economy. With the Government focusing towards attaining GDP growth rates of 7%-9% the key consuming industries could witness increased growth; positively impacting aluminium consumption.
Key Negatives
Volatility in the commodity business has increased over the past few years. Having recovered from the Asian meltdown over FY99 & FY00, the sector once again witnessed a downturn in the current fiscal.
The power sector is the largest aluminium-consuming sector in the country. Considering the stagnation in reforms, the sector has been growing at a pace slower than earlier anticipated.
Net tariff protection for aluminium producers is high. The Finance Minister has indicated intentions of reducing average import rates to Asean levels. Also, downstream industries are lobbying for lower duty on aluminium.
