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Aluminum: Long term play

Mar 21, 2003

The financial year is nearing its close. In this period, the global economies have shown nothing more than a sluggish growth. And commodity prices tend to reflect the situation of the economies. Keeping this in mind, let us see how the aluminum sector has performed in the period so far, amidst all the gloom and uncertain times for major economies of the world. To begin with, if one looks at the aluminum prices since the beginning of this financial year, it shows a trend unlike another commodity, steel. On the one hand, where steel prices have been on a continuous rise, the aluminum price trends show a different picture. The aluminium prices show a declining trend in the first half of the current financial year but since then, the prices have firmed up. Aluminium prices fell from around US$ 1,380 per tonne levels in April to US$ 1,280 per tonne in September. However, since then the prices recovered to touch a high of US$ 1,460 per tonne in February, only to retrace back marginally to the current levels of US$ 1,380 per tonne.


*March'03 price average to date

It must be noted here that the prices of aluminum in the international markets is a factor of the inventory built up. The prices show a reverse trend as compared to the inventory levels. During 1HFY03, when aluminum prices fell by 7%, the inventory levels in international markets had increased by around 22%. Similarly, since then, inventory levels decreased by about 5% in February and hence a 14% rise in prices. In March, the inventory levels have increased again.

On the domestic front, since the prices are influenced by the ruling international prices, the share price of aluminum stocks tends to more or less mirror a similar trend. That said, let us see the scenario on the domestic front. Domestic aluminium production increased by 6.5% during the first nine months of FY03 as compared to 3.9% fall registered in the same period of the previous year. In December 2002, the production saw a healthy rise of 9.6%, after three continuous months of fall in aluminium output. This probably is a key reason for the slight weakness witnessed in prices recently.

Budget 2003-04 did not announce any specific measures for the aluminum sector. However, the increased thrust on infrastructure spending will benefit the industry in the long run. Spending on infrastructure sectors and the announcement that mega power status would now be given to all power projects is a positive for the aluminium industry. The power sector accounts for over 1/3rd of the domestic aluminum consumption. Apart from power, transportation, construction and consumer durables are also the key aluminium-consuming industries.

In the near-term, power and transportation will be the key drivers for the growth of the aluminum sector. With the current power reforms focused on transmission and distribution (T&D) and the possibilities of higher investments in the power sector, once the Electricity Bill is passed, this would contribute to increasing aluminium consumption in the country. Moreover, improvement in infrastructure results in increased trade thus directly benefiting the transportation sector. Thus, considering the facts that the per capita consumption of aluminum in India is very low and India is an emerging market, the longer-term demand outlook remains positive.


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