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Aluminium promises new economy excitement - Views on News from Equitymaster
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  • May 5, 2001

    Aluminium promises new economy excitement

    The aluminium sector, globally, has made a comeback over the last two years with prices firming up on the London Metal Exchange (LME). Prices of the basic metal slid in fiscal 1997 and remained weak in 1998, as the South East Asian contagion and Russian banking crisis jeopardized global economic growth.

    The slackness in demand leading to a slump in prices saw a turnaround with a swift recovery in Asian economies. Also, the Russia and Latin American financial crisis blew over resulting in resurgence of the global economy. Consequently, aluminium prices on the LME recovered from their lows of $1,250 per tonne to $1,650 per tonne. The turnaround in prices was also due to shutdown of operations of a global player. These events positively impacted the fortunes of the aluminium manufacturers.

    The domestic prices, which track the LME, firmed up with buoyancy in the global prices. Domestic aluminium prices continued to remain firm in the fiscal ended March 2001 despite the volatility in the international market place. Stability in domestic prices could be due to the continuing favourable demand supply scenario. Also, the equation in the international markets turned positive in calendar year 2000, as global consumption of aluminium increased by 6%. The higher global consumption in the last two years has been led by China and other emerging Asian markets, which registered consumption growth in double digits.

    Demand Supply Gap
    ('000 MT) FY00 FY01 FY02 FY03
    Production 618 641 624 712
    Domestic 604 571 617 666
    Exports 146 178 132 148
    Deficit -132 -108 -125 -102
    FY - Fiscal year MT - Metric tonne

    However, consumption in the first quarter of calendar year 2001 has tripped with global economic growth rates again slackening. This time the change in fortunes is led by the threat of recession in America, economic turmoil in Japan and the growth in the European Union weakening. Consequently, aluminium consumption in calendar 2001 is expected to register negative growth down sharply from the previous year. The decline in consumption could throw the demand supply situation back into supply surplus negatively impacting the non-ferrous metal prices. Aluminium prices have already softened from their highs to $1,450 per tonne in the quarter ended March 2001. The U.S economy, though, is expected to revive in the second half of 2001, which is providing some support to the international prices.

    Nevertheless, the long-term outlook for the base metal in India is still bullish. The key aluminium consumption industries in India are electrical (36 percent), transportation (22 percent), packaging (12 percent) and construction (7 percent). Most of these sectors form the core industries and their progress is vital for any sustainable growth of the Indian economy. With the Government striving for higher growth rates, determined to break the 6 percent barrier, these industries are poised for rapid growth.

    (%) Aluminium Consumption Growth
    Region 1QCY01 CY00
    North America -15.7 0.3
    Asia -6.9 12.9
    Japan 1.4 3.7
    China 16.9 15.4
    Western Europe 0 4
    World -3 5.9

    The recent budget has increased planned outlay towards the infrastructure sector. Also, it has announced plans to restructure the Indian power sector under the electricity bill. The excise duty on passenger vehicles has been reduced to prop up demand and added sops have been offered to the housing sector. Added to this the Indian consumer is gaining confidence with higher income levels; availability of easy and cheap finance and increased choice. Newer applications are also being sought for the base metal adding to the consumption. Consequently, these events will have a favourable impact on the demand resulting in supply shortage and an opportunity to further expand capacities.

    The Indian aluminium sector continues to undergo consolidation, which could add to the pricing power of the manufacturers. Sterlite Industries recently acquired the Government owned Bharat Aluminium Company (Balco). As per the Government disinvestment plans National Aluminium (Nalco) is expected to be on the block by the end of this fiscal. Although part of the old economy, the aluminium sector promises excitement in 2001.



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