With aluminium prices on the London Metal Exchange (LME) hitting closer to $1,900 (Rs 1 lakh) per tonne in the last quarter, nearly 30 per cent of global capacities are making cash losses. Yet India, led by Hindalco Industries Ltd, will add capacities next year.
Indian aluminium companies have an upper hand compared to its global peers solely because they have captive raw materials such as bauxite and coal.
Hindalco’s 1.5-million-tonne (mt) Utkal alumina refinery project in Odisha and 359-kilo-tonne (kt) Mahan aluminium smelter in Madhya Pradesh will begin commissioning by March-April. The company’s 1.5-mt Aditya alumina refinery and 359-kt smelter project in Odisha will be up and running by mid-2013.
State-owned National Aluminium Co Ltd (Nalco), too, is in the process of setting up a 1-mt smelter project in Gujarat and a 1.4-mt smelter in Andhra Pradesh, apart from its expansion plans at the flagship Jharsuguda plant in Odisha.
Praveen Maheshwari, chief financial officer of Hindalco, said the demand for aluminium in India was still growing faster than the gross domestic product and the newer capacities would definitely find market locally.
However, as the prices are linked to LME, any dip causes erosion of margins if not losses.
“World aluminium consumption has slowed down and is expected to be only eight per cent in 2012 against 15.2 per cent in 2011,” said Debu Bhattacharya, managing director, Hindalco.
He said 30 per cent of the world capacity is making losses and this situation was not sustainable for a long time. An analyst tracking the aluminium sector said: “This is the aluminium cycle. The capacities which cannot make money at current rates will look to shut production. This will make the demand surpass supply and prices will start looking up again.”
In the past couple of years, the world has seen a production cut of nearly 2 mt because of the low LME prices. However, China has been increasing production and that may keep the prices under check.
“The aluminium industry is under unprecedented squeeze,” Bhattacharya said.
According to ICRA, global aluminium consumption during the first half of the current calendar year grew by around three per cent against a growth rate of seven per cent in 2011. However, in the domestic market, growth in consumption of aluminium continues to outpace production growth, resulting in the country remaining a net importer of the commodity.
“The scenario is, however, expected to change in the medium-to-long term, with large capacity expansions currently being undertaken by the primary aluminium players, which is estimated to outweigh the anticipated growth in demand and create surplus capacity in the domestic market,” Jayanta Roy, senior vice-president and co-head, corporate sector ratings, ICRA, said.
On prices, Roy added: “Any upward movement in prices would be largely dependent on the health of the Chinese economy and the steps taken by the country to boost demand.”