Aluminium: What is the story? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Aluminium: What is the story?

Jan 7, 2003

The global aluminium industry has been facing one of the worst phases in recent times, especially after the September 11 attacks in the US. Consider a brief historical perspective. The sharp slump in demand in the year 2001 led to a big fall in international prices of aluminium. The aluminium prices, ruling at about US$ 1,600 per tonne in the beginning of 2001, crashed to lows of about US$ 1,250 per tonne in November 2001. However, prices have started to show an upward trend. But is the price rise sustainable? The global scenario...
Before going into future growth prospects of the sector, consider the global industry structure first. The current global aluminium production capacity is about 23.5 m tonnes (MT). The world leader in aluminium is the US major Alcoa, with a production capacity of 4.1 MT (1/6th of world capacity) and production of approximately 3.5 MT (FY01) with revenues of US$ 23 bn. USA, Canada and Brazil constitute almost 1/3rd of world production, with USA leading the pack with a contribution of almost 15%. Amongst the Asian countries, China's contribution is about 11%.

The top five players in the industry are estimated to control almost 50% of total capacity. This means that the industry is less fragmented (i.e. fewer manufacturers having control of larger market share) as compared to say, steel industry. Just to put things in perspective, the top five steel manufacturers control just 15% of total world capacity. As a result, the bargaining power is relatively on the higher side for aluminium majors.

Now, who are the key consumers? On the consumption front, Asia dominates the consumption scene (35%) with China leading the pack. The rest is consumed by Europe and North America (30% each). Going a step further, transportation and power segments account for a lion's share of total consumption (50%). In transportation, it has to be remembered that the airline industry has a bigger part to play, as far as demand is concerned.

The Indian scenario...
On the domestic front, the current domestic aluminium capacity is around 0.8 MT of which approximately 8% is idle. This leaves approximately 0.7 MT operational. This is just 5% of global capacity. Moreover, India's per capita aluminium consumption is below 1 kg compared to 26 kgs in U.S and 2.7 kgs in China. And while globally there are about 3,000 applications of aluminium, in India one can see only around 300 applications. These factors leave a lot of room for the domestic sector to grow.

The aluminium sector has been showing a decent growth backed by the overall improvement in the economy. The domestic growth is being seen in sectors like consumer goods, packaging (pharmaceuticals and FMCG), transportation and infrastructure (mainly power). The power sector accounts for 37% of industry demand.

Future growth prospects...
After remaining lackluster in 2001, there has been some surge in prices in the international markets. Compared to US$ 1,250 per tonne, prices have recovered somewhat to around US$ 1,340 in the first week of January 2003 on the LME. This rise in global aluminium prices has come on the back of better economic prospects, in the recent past, and improved demand from aluminium consuming industries. This could be vindicated, to an extent, by the rise in capacity utilisation in the first 11 months in the calendar year 2002. Aluminium production is about 19.5 MT in this period, which is up by nearly 3% YoY compared to the same period last year.

How do Indian aluminium manufacturers benefit from the rise in prices? Globally, India has two globally cost-effective aluminium producers viz. Hindalco and Nalco. India is at an advantage mainly due to the fact that the country has huge bauxite reserves (5th largest bauxite reserves in the world). This coupled with cheap labour and captive power units, Indian players have a competitive edge over its MNC peers on the cost front. The average cost of production of aluminium for the domestic companies is about US$ 900-1,000. This when compared to the world average of US$ 1,200 highlights the advantage. Given this backdrop, key players are well poised to capitalise on any upturn in demand.

According to industry estimates, the domestic capacity is likely to touch 1 MT by the end of 2004 with the brownfield expansion of smelters by Nalco and Hindalco coming into stream. However, this additional capacity is unlikely to affect the companies' performance adversely, on the prices front, as they would be able to export the surplus production due to their cost-competitiveness.

In the long term, outlook for the white metal in India is bullish. An increase in the number of potential applications for which aluminum could be used is expected to spur demand for this metal in the future. The government's thrust on infrastructure, in itself, could emerge as a crucial growth driver in the long run. The electrical sector is the largest consumer in the form of wire rods for transmission of electricity. It has to be remembered that rural electrification is on the top of the government's agenda. Besides, economic recovery will aid demand from packaging and consumer durable sectors, and consequently fuel revenue growth.

After looking at the probable reasons for the future upturn in the aluminium industry, it is important to consider the pitfalls also. The year 2001 was tough for the aluminium industry due to a fall in demand for the metal by 6% in the western countries. The performance in year 2002 was also lackluster and nothing to write home about. Slower growth in key economies like the US, Japan and Europe continue to be a cause for concern.

Therefore, ending with the argument that India's per capita consumption of aluminium at around 0.6 kgs leaves a lot of room for growth, the aluminium sector could be an investment avenue for retail investors with a long-term perspective. However, a word of caution would be to re-consider the current pros and cons of the commodity sector before investing.


Equitymaster requests your view! Post a comment on "Aluminium: What is the story?". Click here!

  

More Views on News

Sorry! There are no related views on news for this company/sector.

Most Popular

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

Can the Nifty Fall to 10,200? (Fast Profits Daily)

Sep 24, 2020

The Nifty has reached an important support level today. If it breaks then we could see further downside.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE METAL


Sep 29, 2020 11:41 AM

S&P BSE METAL 5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS