Weak LME prices to squeeze aluminium output growth to 3.7% from 8.9%

Brownfield ramp-ups ruled ou in near term with three top producers - Hindalco, Vedanta and Nalco - running at near peak capacities

After registering 8.9 per cent growth in last fiscal, primary aluminium production is slated for a muted performance in FY20.

Production growth of the white metal in this fiscal year is expected to go up only by 3.7 per cent, a forecast by CARE Ratings said. Subdued aluminium prices on the London Metal Exchange (LME) and the fact that three primary producers - Hindalco Industries, Vedanta Ltd and state-controlled entity Nalco Ltd - are running at near peak capacities will rule out brownfield ramp-ups in the near term.

“We can expect further capacity ramp-ups of aluminium smelters only if the price of aluminium increases sharply from current levels,” CARE Ratings noted in its review on 'Base Metals'.

To compound the woes for the domestic aluminium makers, LME prices have crashed 24 per cent, or by $550 a tonne, from $2,290 in May 2018 to $1,740 a year later. Back home, aluminium production costs have inflated by 25 per cent the past 3-5 years, fuelled by rising costs of critical inputs, coal cess, RPO (Renewable Purchase Obligation), electricity duty and logistics costs, which have torn into the cost competitiveness of the companies. LME prices were ruling at $1,777 a tonne for the cash buyer (as on June 20), lower than the costs of production of the domestic makers, posing a challenge to stay competitive.

Apart from the bearish trend in LME prices, aluminium producers are buffeted by a swarm of imports. At the end of FY19, imports had usurped 60 per cent of the domestic market, nibbling the margins of aluminium makers.

The bright spot for the sector was the growth in overall consumption by 6.2 per cent last fiscal. But the 1.4 per cent slide in primary aluminium consumption took sheen off the consumption story.

“Consumption of primary aluminium has fallen on account of increase in use of aluminium scrap. Scrap imports increased by 20.3 per cent amid the US-China trade war. Aluminium scrap is priced at a discount to LME (which is also popularly known as scrap spread) and also has a low import duty of 2.5 per cent in India. Aluminium scrap is usually used by the auto sector, but since the past two years, because of an increase in the scrap spread, a large part of its usage is getting diverted towards manufacturing of other products as well, which is leading to an increase in its imports," the CARE Ratings report added.

India's aluminium scrap consumption is 100 per cent driven by imports. Scrap comes into the country from the US, UK, UAE, Saudi Arabia, Australia, Netherlands and Singapore. During January-March of calendar 2019, India toppled China as the biggest importer of aluminium scrap.