Aluminium : High Inventory Means Bad News

The less precious but widely used white metal aluminium is losing sheen with an excess of aluminum in the world market causing prices to continue their long slide and inventories to remain stubbornly high.

Even China, which still has a voracious appetite for aluminum, is making too much and putting its excesses on the world market, further weighing down prices.

On the London Metals Exchange, a key indicator for the aluminum industry, prices slipped last Thursday to 59.1 cents a pound, near its lowest level in three years.

A year ago, the price of aluminum was 62.8 cents a pound, and in 2000, it hovered around 70 cents a pound for the year. At the current rate of 59.1 cents a pound, more than 70 aluminum plants throughout the world can't sell their product at a profit, according to a metals analyst at a foreign brokerage house.

Back home, from a strategic perspective, it appears that the aluminium majors perceive that aluminium is likely to remain a `volume game' in the foreseeable future. Primarily because "sluggish global demand" and "excess capacity" are likely to keep aluminium prices under pressure in the near-term.

In the medium-term, at the global level, technological innovations may contribute to a reduction in cash costs for greenfield/brownfield expansion, thereby putting downward pressure on average aluminium/copper prices across a full business cycle.

Second, in India, the rationalisation of the downstream segment in aluminium may take much longer to play out. Particularly, given the excess capacities in rolled products, extrusions and foils, relatively low demand for sophisticated/ customised products / solutions from domestic end-user segments and lopsided tariff structure favouring the primary metal segment.

Since this process of rationalisation may take at least one-and-a-half to two years to be completed and the scope for significant "margin improvement" may be limited. Till that happens, the volumes game may hog the attention of players in the non-ferrous metals industry.

In this backdrop, from a producers' perspective, the `size and `scale' of production capacities and considerable financial/technical strength are likely to pose substantial entry barriers for new entrants into the aluminium industry.

Bringing the entire metals industry under one roof as envisaged by Hindalco and Sterlite is poised to challenge even the entry of international aluminium majors into the country. If the Nalco disinvestment goes to either of these two players, it will create a major gridlock for all prospective domestic and foreign entrants into the non-ferrous metals industry.