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Aluminium: Keep the faith

Dec 1, 2001

Aluminium is the most abundant metal found in the earth's crust. But its entry into mainstream was only in the nineteenth century due to the absence of any process to commercially extract the base metal. Bauxite -- the natural state -- is the most commonly mined aluminium ore due to its high alumina content, which on smelting is converted into primary metal. India is blessed with large bauxite reserves, which could play an instrumental role in the country emerging as a leading aluminium producer. The fifth largest bauxite reserves of 3 bn tonnes, representing 8% of global reserves, are found in India. However, in terms of aluminium production & consumption India ranked ninth and tenth respectively in FY00.

Aluminium had a poor start to the nineties with prices collapsing to $1,100 / tonne levels by mid 1993 from above $2,400 / tonne during 1989. The breakdown of Union of Soviet Socialist Republics (USSR) towards the 90's led to Soviet aluminium producers targeting export markets due to the turmoil back home. The sudden and sharp surge in global aluminium supply resulted in weakening prices. It took the creation of a cartel to pull the industry out of the bear grip.

Over '97 & '98, the environment for aluminium once again turned deleterious with striking of the Asian contagion followed by a financial crisis in Russia and Latin American markets. Having charted a recovery over the next two years commodity markets were once again in bear territory with the tech meltdown spreading across to other sectors in 2001. These trends seem to indicate that cyclicality and therefore volatility of business has increased, which could be attributed to globalization.

Aluminium prices have bounced back after sliding continuously since start of the fiscal. The base metal price, which ruled at $1,500 / tonne levels in April '01 slid to $1,350 / tonne levels by mid September before collapsing post WTC events. Like other commodities, aluminium suffered, as fears of a more pronounced downturn and coercive actions against the perpetrators sent business confidence into a tailspin. The sentiment towards aluminium was even gloomier, as the airline industry was amongst the worst hit from the aftermath of the WTC incidents. Over the next 30 days aluminium prices dropped to 30 month lows of $1,243 / tonne. But belief of a rebound in the global economy sooner rather than later has sent aluminium prices shooting higher, rising by 12.4% from the September '01 lows.

The outlook for the aluminium cycle seems to be favourable. The projected demand-supply gap (deficit) in Western markets for primary aluminium in calendar year '02 is estimated at 2.4 m metric tonnes (MMT). Aluminium inventories are ruling low, which has allowed a smart rally in the metal on hints of economic recovery. Further, instability in power supply has led to shut down of capacities in North West America. Currently, 1.3 MMT of capacity (6% of global capacity) remains idle and is not expected to come onstream over the next 12-24 months.

Global demand-supply scenario…
(MMT) 2000 2001E 2002E
Demand 20.5 20.2 20.9
% growth 4.1% -1.4% 3.6%
Production 17.7 17.4 18.3
% growth 2.6% 1.3% 5.3%
Surplus / (deficit) (2.8) (2.8) (2.6)
Domestic demand-supply scenario…
(MMT) 2000 2001E 2002E
Demand 571 617 666
% growth -5.5% 8.1% 7.9%
Production 641 624 712
% growth 3.7% -2.7% 14.1%
Surplus / (deficit) 70.0 7.0 46.0

Domestically, the largest consumers of aluminium are electricals, consumer durables and transport sector. The recent rally on stock markets seems to suggest bottoming out of the economy and unfolding of a turnaround. A reversal in the economy is likely to result in higher all round demand. The imperative Government is placing on infrastructure road projects viz. golden quadrilateral & North-South, East-West corridor, is likely to prove to be an impetus for the transportation sector. Percolating of this demand to feeder industries could pan out to be a positive surprise for the aluminium sector. The consumer durables sector is showing early signs of recovery with televisions & refrigerators reporting improved sales over the past two months. Though this could be attributed to the festive season.

The power sector is the largest consumer of aluminium and any progress on that front is likely to be a strong driver for demand. Having said that, there is no telling when power sector reforms will unlock growth in the industry. Therefore, ending with the perennial value investing argument India's per capita consumption of aluminium is 0.6 kgs compared to 26 kgs in U.S and 2.7 kgs in China. Keep the faith.

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