New uses for aluminium create hope for producers

Despite falling prices and pressure from cheap imports, producers see a bright future for the white metal

Whether it is Kumar Mangalam Birla of Hindalco, Klaus Kleinfeld of Alcoa or Sam Walsh of Rio Tinto, all will reject the proposition that the long-term fundamental outlook for aluminium is weak. This is in spite of the three-month price of aluminium, which finds application in packaging to construction and automobiles, descending from a monthly average $2,455 a tonne in January 2011 to $1,468 a tonne now. Faith in aluminium's future springs from constant discovery of new uses and its demand growth being the fastest among all metals.

Increasingly, strict fuel and emission norms in the United States and other developed economies have created the condition for automobile groups to work with downstream aluminium units such as Hindalco-owned Novelis and Alcoa to develop alloys of the light white metal for use in virtually every area of a car from body frame to radiator and engine cylinder block. Industry officials, therefore, expect average aluminium content in a car to rise to 250 kg by 2025 from less than 125 kg now.

Come the second half of 2016, Alcoa of the US will split its downstream value-added operation, which is seeing strong demand from automobile and aircraft makers, from the now long down in the dumps aluminium commodity business. Fund managers have given the Alcoa move their thumbs up as it promises to "create value substantially above its current share price."

The assumption is that the expected share value appreciation in the downstream part on its listing will go some way to compensate for the over 45 per cent loss in combined Alcoa's market capitalisation over the past 12 months. Could Alcoa then be the model for the Indian aluminium group with a significant profile in downstream value added products?

The china factor
The loss in Alcoa's share value or for that matter of other aluminium producers, including the ones in India, is caused by rapid price fall in recent quarters with little likelihood of improvement in the short to medium term. The January LME three-month price was $1,822 a tonne. Experts are in consensus that aluminium would not have fared so badly but for China selling its growing surplus production in the world market at prices smacking of a big subsidy.

No wonder then, Chinese aluminium exports are inviting ever more negative scrutiny in India and other markets that are victims of the arrival of large quantities of foreign-origin metal. But India is also targeted by producers in West Asia where aluminium capacity by 2015 end will be 5 million tonnes (mt), rising 36 per cent since 2012. West Asian groups such as Dubai Aluminium, Emirates Aluminium and Aluminium Baharin are acquiring new smelting capacity with a view to replacing imports in their region and are also selling rolled products principally in south and south-east Asia and Europe.

Vedanta Aluminium CEO Abhijit Pati says, "It's absurd that imports (aluminium plus scrap) should have a bigger share of Indian consumption of the silvery-white metal taking advantage of our low customs duty than the three domestic groups. Anticipating the country's aluminium demand will rise to 3.5 mt by 2017-18 from 2.85 mt in 2014-15, the industry is about to complete investment of Rs 1.2 lakh crore to lift smelting capacity to 4.1 mt by 2018-19. But this large investment stands the risk of going sour if imports continue to flood the market."

In 2014-15, the local production of primary aluminium was 1.817 mt, with Vedanta (including BALCO) having a share of 877,000 tonnes, Hindalco 613,000 tonnes and NALCO 327,000 tonnes. Cheap imports saw local aluminium groups' sales declining from 1.379 mt in 2012-13 to 1.270 mt last year. In the same period, imports rose from 1.327 mt to 1.585 mt, which gave them a share of nearly 56 per cent of the Indian aluminium market.

Creating barriers
In these circumstances, the Union mines ministry sees merit in the industry's demand that import duty should be stiffer than the current five per cent. It will finally be the finance ministry's call whether the revised import tax will be 7.5 per cent or 10 per cent as demanded by metal producers. But in no case the government will overlook the interests of the aluminium-using fabricators. It is not that the industry here is not among the "most competitive" producers of the metal in the world. Therefore, it's demand for a higher tariff barrier to ensure imports stop whisking away large portions of the local market does not appear unjustified. Even while none of the Indian aluminium makers has ownership of coal mines, and in one case not even bauxite deposits, the industry's production costs globally have remained in the lowest quartile because of efficient smelter operations.

Indian producers' complaint that "great degrees of subsidisation" are enabling China to export at least 20 per cent of its production finds resonance among countries where smelters fare badly even after ceding capacity. In the first ten months of 2015, Chinese aluminium exports are nearly 18 per cent ahead from a year earlier. Understandably then, complaints of dumping of aluminium or making wrong declarations of products to avoid paying import duty against China continue to pile up in the US and Europe.

As one might expect, China denies aluminium exports are subsidised. But smelters there have the benefit of subsidies in various forms like easy bank credit and cheap power. The world is aware of how China's provincial governments extend benefits to smelters conditional upon sustaining production and jobs not being axed. This will explain why in spite of most smelters being in the red, China will end this year with production up at least 11 per cent to 30 mt. It's not that there has not been any capacity shedding in China in recent years. But new capacity creation is running miles ahead of any scrapping of smelters. Since 2010, China has commissioned 17 mt new smelting capacity, while capacity closure amounts to 3mt.