Oct 13, 2006|
Aluminium - Its here to stay!
India is the fifth largest producer of aluminium in the world, accounting for around 5% of the total bauxite reserves (raw material for aluminium). India's installed aluminium production capacity is about 3% of the world capacity. With the present level of consumption of aluminum, the identified reserves would have an estimated life of over 350 years. During the year 2005, the gap in the world aluminium supply and consumption was barely 0.19 MMT (million metric tonnes). The world supply and consumption increased by 7.2% YoY and 5.1% YoY respectively during 2005, while the higher demand for the metal from the USA, Europe, China, Japan, India and South Korea helped strengthening the international prices. On the domestic front, during FY05, the country's aluminium consumption increased by 8.3% YoY. The domestic demand for aluminium, given the anticipation of a healthy growth in the country's GDP, is expected to grow at 10% per annum in the next 3-4 years.
Barriers to entry
The domestic aluminium industry is characterised by a high degree of concentration because of the following reasons:
- High capital costs because of large plant sizes (1.5 lakh - 2 lakh tonne per annum smelters) and high capital intensity, and
- Restricted access to technology, tie -ups have to be entered into with global technology suppliers
While globally, the automotive and construction sectors are the major end-users of aluminium, in India, the bulk of the demand is accounted for by the electrical sector, followed by automotives. The anomaly can be attributed largely to government regulations that were in force till as late as 1991. Till 1970, 50% of the total aluminium metal output had to be of electrical grade. Due to this, there was shortage of commercial grade aluminium. Since 1990, the share of demand from electrical sector declined gradually from 37% in 1992 to 31% in 2005. Conversely, for the same period, the share of construction has increased from 7% to 13%. The share of automotive has declined from 21% to 18% during the same period.The usage pattern for aluminium in the sectors mentioned is different in India as compared with the rest of the world, as can be seen from the adjecent table.
Source : ICRA Sector report
The two technologies commonly used for aluminium production are the Bayer process (for the production of alumina from bauxite) and the Hall-Heroult process (for electrolytic reduction of alumina to aluminium). The key inputs in the manufacturing process are alumina, power and consumables, such as anodes and caustic soda. Of these, bauxite comprises 6% of the total raw material cost while power accounts for 21% of the total manufacturing cost.
Indian aluminium producers are one of the lowest cost producers of the metal in the world. The average cost of bauxite production in India is US$ 5 per tonne as against the world average of US$ 20 to US$ 25 per tonne. Bauxite is the single largest cost item for the manufacture of alumina giving India a competitive advantage.
The production of primary aluminum relies on an electrolytic process and is highly electricity-intensive. Power is both the major and critical component in the production of aluminium. As smelters are energy intensive, requiring 15,000-18,000 units of power to manufacture one tonne of aluminium and, their continuous operation is necessary, sudden stoppages have a serious impact on the cost of production.
Because of the critical importance of uninterrupted electricity supply, all domestic aluminium producers have set up captive power plants instead of relying on commercial power, which is both costly and erratic. While the power consumption per tonne of aluminium by smelters worldwide is around 14,000-15,500 Kwh, the most efficient Indian producer Nalco consumes 15,000 Kwh per tonne whereas Hindalco consumes 16,000 Kwh per tonne.
Threat of substitutes
Steel, wood and copper are the main substitutes of aluminium. The relatively low per tonne cost of steel, the higher aesthetic appeal of wood, and the higher conductivity of copper are some of the major factors that favour demand for aluminium substitutes. However, aluminium with properties like higher strength-to-weight ratio, durability, and higher corrosion-resistance is still able to counter competition. It is also worth mentioning that with the copper prices heading north on LME (London Metal Exchange), aluminium might emerge as a substitute for the former!
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