Aluminium Industry India - Sector Research & Analysis - Equitymaster
X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2019 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Aluminium 

[Key Points | Financial Year '09 | Prospects | Sector Do's and dont's]

  • 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 categorised 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 Indian Aluminium (Indal), now merged with Hindalco, Bharat Aluminium (Balco) and Madras Aluminium (Malco) the erstwhile PSUs, which have been acquired by Sterlite Industries. Consequently, there are only three main primary metal producers in the sector.
  • The per capita consumption of aluminium in India continues to remain abysmally low at under 1 kg as against nearly 25 to 30 kgs in the US and Europe, 15 kgs in Japan, 10 kgs in Taiwan and 3 kgs in China. The key consumer industries in India are power, transportation, consumer durables, packaging and construction. Of this, power is the biggest consumer (about 44% of total) followed by infrastructure (17%) and transportation (about 10% to 12%). However, internationally, the pattern of consumption is in favour of transportation, primarily due to large-scale aluminium consumption by the aviation space.
  • The metal has a long working life due to its propensity for recycling. Recycled metal requires significantly less amounts of energy for manufacturing of primary aluminium. Just to put things in perspective, the recycling of aluminium scrap requires 5% of the energy required for primary smelting, which is astoundingly lower, considering that power is such a high cost component.

How to Research the Aluminium Sector (Key Points)

  • Supply
  • Supply of aluminum is in excess and any deficit can be imported at low rates of duty. Currently, domestic production comfortably meets domestic requirements.
  • 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 rationalise 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 ↑

Financial Year '09

  • Global production of primary aluminium rose continuously from 32 million tonnes (MT) in 2005 to 38 MT in 2007, registering a CAGR of 9%. However, during 2008 the production remained flattish at around 38 MT (2007 levels) on account of significant fall in demand in the second half of the year due to the global credit crisis. This created a large amount of demand supply gap, thus making the inventory levels at LME reach their multi year highs. China accounted for around 30% of the total global aluminium production. Asia, once again showed the largest annual increase in consumption of primary aluminum, driven largely by increased industrial consumption in China, which has emerged as the largest aluminum consuming nation, accounting for 35% of global primary aluminum consumption in 2008. As far as the global consumption goes, it declined by around 3%YoY to 37 MT in 2008.
  • The Indian aluminium industry registered a growth of around 9% in FY09. Strong growth in industrial, infrastructure, automobile, transportation and power sectors during the first half of the fiscal were the key drivers for the demand. However, realizations for the fiscal fell significantly on account of fall in LME prices due to the global credit crisis, thus causing a dent in margins. On the other hand, the steep depreciation of Indian rupee against the US dollar impacted the industry positively. The total aluminium production in the country stood at around 1.35 m tonnes in FY09.

top ↑

Prospects

  • Globally, the demand for aluminium is projected to fall by around 7% in 2009 on account of subdued conditions in the key user industries. However, China is projected to maintain the consumption levels of 2008 mainly due to the fiscal stimulus package that is likely to support its ailing economic growth. The revival in the demand for the metal is expected to start from 2010 globally. As per Alcoa, world’s largest aluminium producer, the demand for aluminium is projected to grow at around 6% CAGR till 2018 on account of newer packaging applications and increased usage in automobiles, consumer durables, construction and defense.
  • With key consuming industries forming part of the domestic core sector, the aluminium industry is sensitive to fluctuations in performance of the economy. Power, infrastructure and transportation account for almost 3/4th of domestic aluminium consumption. With the government focusing towards bringing back GDP growth rates of above 8%, the key consuming industries are likely to lead the way, which could positively impact aluminium consumption. Domestic demand growth is likely to remain robust over a long term period.
  • In order to protect the domestic industry, the government has imposed up to 30% safeguard duty on import of aluminium products from China. Imports of aluminium flat sheets used by sectors like auto and construction are imposed a duty of 12% to 14% while import of aluminium foils, mainly used by the packaging industry attracts around 25% to 30% duty. This duty is imposed for a period of two years starting March 2009.

top ↑

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

Views on News

Hindalco Industries: One-Time Provisioning Takes Toll on Profitability (Quarterly Results Update - Detailed)

Nov 9, 2017

Hindalco's net profit declined by 10.7% YoY due to a one-time provisioning of Rs 1.06 billion towards mining litigation case.

Hindalco Industries: Deleveraging Kicks in, One-Offs Hurt the Bottomline (Quarterly Results Update - Detailed)

Aug 22, 2017

Hindalco Industries has reported a healthy growth in the topline on the back of Higher volume and realisation for both Aluminium and Copper segments. However, the bottomline declined marginally primarily on the back a provision of Rs 1.04 billion.

More Views on News

Most Popular

7 Stocks That Will Remain Evergreen in this Era of Technological Disruption(The 5 Minute Wrapup)

Jun 13, 2019

We are living in an era of disruption. Are your stocks well equipped to adapt to changes that disruption will bring along?

The Great Indian NBFC Bubble Has Burst but I Will Still Recommend These Safe NBFCs(The 5 Minute Wrapup)

Jun 11, 2019

One chart that predicted the NBFC crisis back in 2016.

Just One Stock Made Buffett Billions - And Can Make You Crores(Profit Hunter)

Jun 6, 2019

Coca Cola is arguably one of Warren Buffet's best stock picks. But did you know that small investors picked up the stock five decades before Buffet? Read on...

Kenneth Andrade Would Like Our Real Estate Stock Recommendation with Triple Digit Upside(The 5 Minute Wrapup)

Jun 12, 2019

This real estate stock recommended in Smart Money Secrets offers the most favourable upside potential.

Why Modi 2.0 Will Be Great for These 7 Stocks(Profit Hunter)

Jun 10, 2019

The government's focus on Infra, electricity, water for all will be the key factors for Sensex 1,00,000.

More

Get the Indian Stock Market's
Most Profitable Ideas

How To Beat Sensex Guide 2019
Get our special report, How to Beat Sensex Nearly 3X Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE METAL


Jun 17, 2019 (Close)

S&P BSE METAL 5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS