Aluminium Sector Analysis Report 

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• 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 billion 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 categorized 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 Bharat Aluminium (Balco), a subsidiary of Vedanta Resources.
• Aluminium offers a rare combination of valuable properties. It is three times lighter than Iron but is almost as strong as steel, extremely flexible and corrosion resistant due to thin surface layer of aluminum oxide. Aluminum has been continuously finding new applications due to rising price competence, superior weight to strength ratio, corrosion resistance, formability, dampness etc.
• On the industrial side, aluminium is heavily used in electrical power transmission, machinery and equipment, and construction. Housing, in particular, makes heavy use of the lightweight material as a substitute for steel and wood in doors, windows and siding. On the consumer side, aluminium is used in a variety of retail products, including cans, packaging, air conditioners, furniture and vehicles.

• Supply
• Supply of aluminum is in excess and any deficit can be imported at low rates of duty. Currently, the demand is stable while supply is in excess.
• 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 rationalize 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.

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• After five years and seven months, LME price of aluminium crossed the US$2,100/t mark in October 2017 to US$2,130/t. There were multiple factors which supported the LME price of aluminium in 2017. The major being Chinese supply reforms such as winter cuts and permanent closures of illegal capacities on the back of increase in global demand.
• Global Aluminum demand excluding China grew by 3.5% in 2017 compared to the earlier year. In China, it rose by 8% in 2017 driven primarily by the transportation, packaging and industrial segments.
• Notwithstanding the supply-side reforms in China that were expected to curtail production, production grew at a significant rate of around 13% in CY17 to 36 Mt, compared to growth of around 4.2% in CY16. On the contrary, production in the World ex. China was flat at 27.2 Mt in CY17 compared to 26.9 Mt in CY16 on account of decline in production in the Middle East and Western Europe. Only India witnessed an increase in the production of aluminium. Australia and North America also continued to witness a decline in production in CY17.
• In the later half of 2017, surge in input costs coupled with low inventory levels led to an increase in the price of aluminium in the global market.
• The average value of LME price of aluminium rose around 23% to US$1,969/t in 2017 compared to US$1,604/t in 2016. Along with the prices, premiums also witnessed a sharp upturn in 2017 due to primary aluminium.
• In CY17, primary aluminium consumption touched around 64 Mt compared to approximately 60 Mt in CY16. Demand in China registered growth of over 8% for the second year in a row, driven primarily by the transportation, packaging and industrial segments.

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• The Domestic Demand for aluminum in India is expected to benefit from the Infrastructure projects prioritized by the government. The government’s thrust on the power which sector is the dominant consumer of aluminum in India, augurs well for the aluminum industry.
• The Automobile and food packaging industries are also expected to stoke aluminium growth. Furthermore, rapid urbanisation should augment consumer demand, yet another positive for the sector. Moreover the per capita aluminium consumption is far below the global average. This offers a huge potential, given our demographic and economic outlook.
• The global consumption of primary aluminium is expected to touch around 66 to 67 Mt in CY18. Transport, construction and machinery and equipment are among the few user industries that are expected to drive the demand for primary aluminium in CY18.
• On the LME side, surge in input cost, expected rise in demand and possible implementation of winter cuts in China for the second year in a row, are some of the factors likely to impact LME price of aluminium positively in CY18. On the other hand, emergence of trade protectionism and strong dollar value coupled with more than expected moderation in Chinese demand may put downward pressure on LME price of aluminium.
• Since the beginning of CY18, the aluminium industry and the LME price of aluminium are being majorly impacted by the US trade policies and announcement of sanction on UC Rusal created volatility in the global market. The US imposed tariff of 10% on aluminium imports under Section 232. This led to restarting of some aluminium smelters in the US in CY18. However, the actual impact of the restarting of smelters in the US is likely to be felt after CY18. It is expected that China will continue to focus on environmental issues which in turn may adjust the production of primary aluminium going forward.
• US primary consumption rose by 1.0% (54,000t) in 2017, and it is expected that consumption will increase by an additional 3.0% (1,62,000t) in 2018. It is also expected that aluminium consumption growth in 2018 will be spread across the industry, with demand reported strong in the building sector as well as in the truck and trailer markets.
• The outlook for 2018 European primary demand remains firm, despite the disappointing economic figures for the eurozone in Q1. Primary aluminium consumption for Europe in 2018 is expected to be at 9.5 Million Tonnes, up 3% year-on-year.
• As per forecast by the International Monetary Fund (IMF), India will be the fastest growing major economy in 2018 with a growth rate of 7.4% that rises to 7.8% in 2019 with medium-term prospects remaining positive. The IMF said that India was recovering from the effects of demonetisation and the introduction of the Goods and Services Tax and the recovery is expected to be underpinned by a rebound from transitory shocks as well as robust private consumption.
• On the domestic front, we expect demand to recover significantly in FY19 with the surge in industrial activity. The power, packaging and transport sectors are the likely demand drivers of aluminium in India in FY19. The domestic imports of aluminium products, including scrap, are growing significantly, which is a major concern for the domestic aluminium producers.
• The total Aluminium Production in India increased by a huge 18.1% during 2017-18 to 3.4 Million Tonnes. During the same period, the Aluminium consumption grew by a healthy 9.8%, of which, Aluminium imports contributed 54.1%. Aluminium exports by Primary producers was 1.72 Million Tonnes, registering a growth of 31.5% year-on-year.
• It remains to be seen what kind of impact, direct or indirect, is made by the imposition of trade tariffs by the US on India’s exports. However, the domestic market is expected to show robust growth, supported by the increased industrial activity in the country and various Government schemes like Make-in-India and Smart Cities. In anticipation of an increase in demand, the primary producers have been ramping up their production over the last year, which is expected to continue this year as well.

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