Aluminium Sector Analysis Report 

• The most commercially mined aluminium ore is bauxite, as it has the highest content of the base metal. The primary aluminium production process consists of three stages. First is mining of bauxite, followed by refining of bauxite to alumina and finally smelting of alumina to aluminium. India has the fifth largest bauxite reserves with deposits of about 3 bn tonnes or 5% of world deposits. India’s share in world aluminium capacity rests at about 3%. Production of 1 tonne of aluminium requires 2 tonnes of alumina while production of 1 tonne of alumina requires 2 to 3 tonnes of bauxite.
• The aluminium production process can be categorized into upstream and downstream activities. The upstream process involves mining and refining while the downstream process involves smelting and casting & fabricating. Downstream-fabricated products consist of rods, sheets, extrusions and foils.
• Power is amongst the largest cost component in manufacturing of aluminium, as the production involves electrolysis. Consequently, manufacturers are located near cheap and abundant sources of electricity such as hydroelectric power plants. Alternatively, they could set up captive power plants, which is the pattern in India. Indian manufacturers are the lowest cost producers of the base metal due to access to captive power, cheap labour and proximity to abundant supply of raw material, i.e., bauxite.
• The Indian aluminium sector is characterised by large integrated players like Hindalco and National Aluminium Company (Nalco). The other producers of primary aluminium include Vedanta Resources Plc.
• The principal user segment in India for aluminium continues to be electrical & electronics sector followed by the automotive & transportation, building & construction, packaging, consumer durables, industrial and other applications including defence.

• Supply
• Supply of aluminum is in excess and any deficit can be imported at low rates of duty. Currently, the demand is stable while supply is in excess.
• Demand
• Demand for aluminium is estimated to grow at 6%-8% per annum in view of the low per capita consumption in India. Also, demand for the metal is expected to pick up as the scenario improves for user industries, like power, infrastructure and transportation.
• Barriers to entry
• Large economies of scale. Consequently, high capital costs.
• Bargaining power of suppliers
• Most domestic players operate integrated plants. Bargaining power is limited in case of power purchase, as Government is the only supplier. However, increasing usage of captive power plants (CPP) will help to rationalize power costs to a certain extent in the long-term.
• Bargaining power of customers
• Being a commodity, customers enjoy relatively high bargaining power, as prices are determined on demand and supply.
• Competition
• Competition is primarily on quality and price, as being a commodity, differentiation is difficult. However, the recent spate of consolidation has reduced the competitive pressure in the industry. Further, increasing value addition to aluminium products has helped some companies protect themselves from the high volatilities witnessed in this industry.

top ↑

• The major commodity demand driver China, (that accounts for over 40% of global demand in Aluminium and Copper) slowed down considerably on fears of hard landing for the economy. India too, suffered on account of monetary tightening and subdued investment and growth climate with industry/GDP growth slowing down considerably.
• Global Aluminum demand growth normalized to around 5% in 2012, after a sharp growth in the preceding two years on the back of global recovery from the 2009 crisis. World’s leading manufacturer Alcoa expects demand growth to be in the region of 7% in 2014. In 2014, China’s, North America’s and Europe’s growth is expected to be in the region of 10%,5% and 1% respectively.
• The industry continued to be plagued by high inventories, which has been a huge overhang on the prices. Cost of production for most aluminium players continued to remain high due to challenges pertaining to energy inputs and resources.
• India with its abundant supply of quality bauxite and low cost labour has established itself as a low cost producer of primary aluminium. However, in India, the production of primary aluminium has stagnated around the 1.6 to 1.7 MT mark for the last three years. The three primary aluminium producers, viz. Hindalco, Vedanta and Nalco have expansion plans as well as greenfield projects that should increase the production in the foreseeable future.

top ↑

• China has been a marginally surplus producer of aluminium, while India turned aluminium deficit in 2011 after being a marginal surplus producer for many years. However, commissioning of new capacities will make India surplus in aluminum in the near future.
• Long term outlook for aluminium continues to remain strong with Global aluminium demand expected to increase at a CAGR of 6%, with expected growth of 9% till 2020. This growth rate, though strong, pales in comparison with the stupendous rate at which Chinese aluminium consumption has grown over the last decade.
• The supply is expected to remain strong as several producers continued to produce despite low LME. High physical premiums too worked as an incentive to continue production. Global Aluminium production is expected to grow at a rate matching production increase which will come from China and Middle East. Production from both these regions is expected to grow at around 8-9%.

top ↑

Related Links for Aluminium Sector
Quarterly Results | Sector Quote | Over The Years