Rising exports, cost efficiency to help aluminium makers bear 4-yr low prices: Report

Aluminium prices have declined to four-year lows and domestic demand has evaporated due to the COVID-19 pandemic, but rising exports, cost efficiency and adequate cash will help producers weather the disruption, a report said.

Fiscal 2021 has started on a jarring note for aluminium makers with the price of the metal plumbing to four-year lows of USD 1,450 per tonne on the London Metal Exchange, and domestic demand evaporating because of the coronavirus-driven lockdown, Crisil Research said in its report.

While that will squeeze bottomlines this fiscal, efficient cost structure and adequate cash would buffer credit profiles and help aluminium makers weather the viral disruption, it added.

It said the ongoing lockdown has not affected production because aluminium is an essential commodity.

However, domestic demand -- largely from the power transmission, automobiles and construction sectors -- has plummeted.

This domestic sales loss has been offset by companies aptly exporting more, thanks to high cost-competitiveness that stems from improved sourcing and lower input costs, the report said.

Further, Crisil Ratings said over the past two fiscals, producers have improved their bauxite access and coal linkage to 70 per cent.

While bauxite security helps maintain higher operating rates and profits, it is the improved coal linkage and cheaper e-auctioned coal that are making the big difference now, it added.

"Linkage coal is 30-40 per cent cheaper than imports and is seeing higher materialisation due to lower industrial activity.

"On the other hand, e-auction coal has seen average premiums falling steadily from a high of 131 per cent in December 2018 to 36 per cent as of March 2020. This has lowered the cost of electricity, which accounts for 40 per cent of the cost to produce aluminium," Crisil Ratings Senior Director Manish Gupta said.

That competitiveness helped smelters almost fully offset domestic volumes by exporting almost their entire production since the lockdown.

Aluminium exports had already risen over the past few years to more than 50 per cent of production in FY20.

"With only a partial loss in revenue during the lockdown and continued cost efficiencies, we estimate that even at current realisations, companies will reel in operating profits of over USD 200 per tonne in fiscal 2021," Gupta added.

Current operating profitability of the industry would still be only 60 per cent of the average per tonne profitability over the past five years, Crisil Ratings Associate Director Naveen Vaidyanathan said.

"However, what cushions their credit profiles is the strong cash buffer, which is 3 times the debt obligations for this fiscal," he added.

Domestic as well as global aluminium demand is expected to witness de-growth in fiscal 2021 amid the COVID-19 crisis.

However, with likely strong demand fundamentals, in the post-COVID era, global aluminium demand may grow 3 per cent annually, supported by increasing penetration in the automobile, construction and packaging industries.

Domestic demand is presaged growing 5 per cent owing to increasing penetration in the power transmission and automobile sectors, it said.