Domestic companies will continue to shine... - Views on News from Equitymaster

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Domestic companies will continue to shine...

May 13, 2000

Global aluminium markets saw opportunity in adversity during 1999. Quite literally. The accident at Kaiser's alumina refinery triggered a sharp rise in prices as producers realized that the mishap would narrow the gap between demand and supply. Even as alumina prices rallied to over US$ 400 per tonne, aluminium prices rose from US$ 1,250 per tonne to a high of US$ 1,700 per tonne. Aluminium producers never had it so good in over two years.

During calendar year 1999, global aluminium production grew 4.3 percent to 23.7 million tonnes. Consumption on the other hand jumped 6.5 percent to 23.6 million tonnes. The narrowing gap had the desired effect on prices.

In the global arena, India offers tremendous opportunity for aluminium players. Domestic demand is anticipated to average a growth of 8 percent in coming years even as global demand grows at a more sedate 3-4% percent. And with domestic economic activity already gaining momentum, the demand for aluminium should witness considerable growth. To put this in perspective, automobile production has jumped 15% in financial year 2000.

Primary Metal Production
Company FY99 FY00 % Change
Nalco 146,206 212,633 45.4%
Hindalco 204,926 248,930 21.5%
Balco 91,844 94,352 2.7%
Indal 42,193 43,456 3.0%
Malco 24,804 18,500 -25.4%

On the production side, the availability of large bauxite reserves and cheap labour makes it doubly attractive to venture into Indian markets. A prime example of a company that is exploiting this advantage is National Aluminium, the Indian aluminium giant, which is a large exporter of alumina to various international markets.

Not that international companies have totally ignored India. Till recently ALCAN had a majority stake in Indian Aluminium, a company specializing in the production of alumina and downstream aluminium products. It also has a 35 percent interest in the Utkal Alumina, a one million tonne per annum integrated alumina plant. International aluminium companies have also been present in Indian markets by way of exporting to the country. Infact, in financial year 1999, India imported over 95,000 tonnes of primary metal alone.

The international price scenario has cooled off in recent weeks. Infact aluminium prices have dropped 15% to US$ 1,450 per tonne from peak levels. Alumina prices too have receded sharply and are currently at US$ 250 per tonne. Domestic aluminium prices are currently at an 8% discount to international prices. The Indian aluminium sector, it seems has had its short moment of glory - high prices, high demand. Now the realities are setting in.

With the underlying fear that global demand will slow down in view of the efforts of various authorities to quell inflation, there is downward pressure on aluminium prices. In recent weeks, capacities that were earlier shut down due to low prices have been reactivated. This has added to supply.

India is a net importer of aluminium. In other words, the domestic capacity is unable to meet domestic demand. Another one factor in favour of India companies are the low costs of production - comparable with the best in the world. In view of this and the high import duties levied on import of aluminium, the domestic sector seems well placed to capitalise on the opportunities for growth.

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