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Aluminium: Building capacity - Views on News from Equitymaster
 
 
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  • Apr 22, 2003

    Aluminium: Building capacity

    The China effect has led to the domestic steel industry displaying one of its best performances in recent times. However, not all commodity industries were as lucky as steel in the year gone by, for example the aluminium industry. Domestic aluminium companies like Hindalco and Nalco have not been able to perform well on the bourses over the last year. While Hindalco stock price closely follows the aluminium prices on the LME, Nalco is dependant on rumors and expectations as regards its disinvestments story too. We take a look at the sector developments in the quarter gone by.

    Updated till April 17, 2003

    The movement of the Hindalco stock price vis-à-vis LME prices is clearly visible in the chart above. It can be seen that the prices of aluminium on the LME have been showing signs of improving since the beginning of April 1, 2003. This has also led to a spike in the stock price of Hindalco and Nalco. One reason for the improvement in the prices of aluminium on the LME could be the fall in aluminium inventory levels which currently stand at about 1.21 million tonnes (MT), down from 1.26 MT a month ago.

    Alumina prices have nearly doubled from US$ 160 in November last year to about US$ 300 currently. This could also be one of the reasons for the spike in the prices of the domestic majors, particularly Nalco, which is a major player in the alumina segment. Also, China continues to power ahead with a growth of 15% per annum backed by the growth in its automobile, consumer durables and construction sectors. However, rising alumina prices seemed to have made Chinese aluminium less export competitive. Therefore, it is not in favour of exporting aluminium currently. Thus, China has slowed down its aluminum exports for the month of March in the wake of increasing domestic demand.

    However, prospects for the aluminium industry seem to be brightening if the capacity expansion plans of major companies, both domestic and international, are any indication. In the anticipation of an increase in demand, domestic companies like Hindalco and Nalco have showed intentions of increasing their production. Just to put things in perspective, the domestic aluminium industry is slated to grow at about 5%-6% for the next few years. While Hindalco has expanded its capacity by 100,000 tonnes, Nalco has indicated of increasing its production of metal by 20% in FY04 and alumina production by 6%. Moreover, the company is in the midst of its aluminum capacity expansion plan to 345,000 tonnes from the current 230,000 tonnes.

    International aluminium majors have also expressed their intentions of increasing their aluminium capacities. To begin with, French major, Pechiney, is moving ahead with its 460,000 tonnes aluminium capacity expansion in South Africa. Also, it plans to form an alliance with the Russia’s second largest aluminium producer, SUAL, to build an alumina refinery and an aluminium smelter in Russia. Recently, the world’s second largest producer, Russian Aluminium, said that it might commence building a new 0.5 million tonnes capacity next year. Chinese aluminium major, Chalco, also has similar plans. With these expansions and more in the pipeline, it is quite likely that the world’s aluminium smelter capacity will exceed 32 million tonnes from the current 28 million tonnes in the next 3-4 years.

    On the domestic front, outlook for the white metal in India remains positive in the long term. 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 power sector is the sector’s largest consumer and it must be remembered that ‘electricity for all’ is one of the top priorities of the government’s agenda. Power reforms are on the cards with the Electricity Bill already passed in the Lok Sabha and due for its passage in the Rajya Sabha. Besides, economic recovery will aid demand from packaging and consumer durable sectors, and consequently fuel revenue growth. 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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