Mar 26, 2009|
Aluminum: Through the lens of Michael Porter
Backed by abundant and good quality bauxite reserves and cheap labour costs, Indian aluminum producers have emerged among the lowest cost aluminium producer in the world. India is home to the sixth largest bauxite deposit in the world which makes its world's 5th largest aluminium producer. Aluminum industry in India registered a phenomenal growth during the past few years on the back of robust growth in the economy. However, the current ongoing global crisis seems to have created some medium term hiccups. In this article, we have analysed the domestic aluminium industry through Michael Porter's five forces model so as to understand the competitiveness of the sector.
Barriers to entry: We believe that the barriers to entry are medium. Following are the factors that vindicate our view.
- Economies of scale: As far as the sector forces go, scale of operation does matter. Benefits of economies of scale are derived in the form of lower costs and better bargaining power while sourcing raw materials. It may be noted that the minimum economic size of a fully integrated greenfield smelter is around 250,000 tonnes. The aluminium companies, which are integrated, have their own mines for key raw materials such as bauxite and coal and this protects them from the potential threat for new entrants to a significant extent. They also have their own power plants as it is a major cost driver.
- Capital intensive: Aluminium industry is a highly capital intensive business. It is estimated that a capital investment of around US$ 1.2 bn is required to setup a economically viable greenfield project.
- Higher gestation period: The gestation period for an economically viable green field plant is over 4 years while for a brownfield project, (modernization / capacity addition) the gestation period is relatively lower between 1.5 years to 2 years.
- Government policies: The government has a favorable policy towards aluminium manufacturers. In fact to protect the domestic industry, recently, the government has imposed duty on value added products like foils and rolled products from the Chinese markets. However, similar to other sectors, there are certain discrepancies involved in allocation of mines and land acquisitions. Furthermore, regulatory clearances and other issues are some of the major problems for the new entrants.
Bargaining power of suppliers: The bargaining power of suppliers is low for fully integrated aluminium smelters (upstream) as they have their own mines for key raw material like bauxite. Examples here could be Nalco and Hindalco. However, those who are non-integrated or semi integrated, (downstream) have to depend upon the upstream producers for alumina or primary metal. While the bargaining power is limited in case of power purchase as it is highly regulated sector and government is the sole supplier most of the times, increasing usage of captive power plants are helping the companies to rationalize their costs to certain extent.
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 volatility witnessed in the industry.
Threat of substitutes: On one side, the usage of aluminium is rising continuously in the automobile and construction sector but steel still remains a main substitute because of its relatively lower cost. On the other side, copper has been slowly substituting aluminum's usage in the power sector due to its higher conductivity. However, with properties like higher strength-to-weight ratio, durability, higher corrosion-resistance and relatively lower cost, aluminium is able to hold its own. Thus the usage of aluminium is likely to increase over a long term period.
More Views on News
Aug 22, 2017
Hindalco Industries has reported a healthy growth in the topline on the back of Higher volume and realisation for both Aluminium and Copper segments. However, the bottomline declined marginally primarily on the back a provision of Rs 1.04 billion.
Feb 22, 2017
Hindalco Industries has reported a 14.5% YoY increase in the topline while the bottomline came at Rs 3.2 billion.
Dec 21, 2016
SAIL has reported a 21.4% YoY increase in the topline while the bottomline reported a loss of Rs 7.31 billion.
Dec 19, 2016
Tata Steel has reported a 0.1% increase in the topline while the bottomline was in red in 2QFY17.
Nov 30, 2016
Hindalco Industries has reported a 1.1% YoY increase in the topline while the bottomline has accelerated by 255.4% YoY.
More Views on News
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 10, 2017
Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 10, 2017
Bitcoin hits an all-time high, is there more upside left?
Aug 16, 2017
Ensure your financial Independence, and pledge to start the journey towards financial freedom today!
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407