Aluminium Units Pin Hopes On Better Lme Prices

INDUSTRY MONITOR

The financial health of aluminium majors paled during 1996-97, mainly due to subdued aluminium prices on the London Metals Exchange (LME) during fiscal 1996-97.

The aluminium industry, after a healthy growth of 31 per cent in 1994-95 and 22.3 per cent in 1995-96, saw its sales turnover slump by 2.4 per cent during 1996-97.

Net profits of three aluminium majors also fell by 11.6 per cent from a hefty 80 per cent growth in 1994-95 and 53 per cent in 1995-96.

Aluminium prices on the LME hit a years low in mid-October 1996. The slowdown in the European economies contributed to the poor demand. Falling demand from the industrial sector also left large aluminium stocks piled in warehouses towards the end of 1996.

 

Inventories rose from 5 lakh tonnes in August 1995 to 9.7 lakh tonnes in October 1996. Aluminium stocks increased to meet consumer demand for more than 10 weeks against the normal required supply for six to seven weeks.

This affected aluminium prices on the LME from around $1750-1850 per tonne in the second and third quarter of 1995-96 to an average $1584 per tonne in January 1996.

This fell further to an average $1484 by June 1996. The slump in prices continued thereafter to hit a two years low of $1280 in the first week of October 1996.

During the period, domestic aluminium prices fell from Rs 70,000 to around Rs 60,000 per tonne and inventories increased from around 12,000-13,000 tonnes to 40,000 tonnes.

Domestic users took advantage of imports which were cheaper by Rs 3500 per tonne in November and December 1996 and imported 45,000 tonnes during that period.

A sharp fall in aluminium prices, grim power situation, rising inventory levels and high cost of borrowing worsened the situation further for the domestic aluminium companies. Power supply glitches at Hindalcos smelter during the early part of 1996-97 resulted in a drop in the companys aluminium production by about 7,000 tonnes.

The companys plan to increase power generation capacity at the Renusagar plant was also delayed as a result. National Aluminium (Nalco), the public sector giant, had to contend with sluggish demand for its products during the year to March 1997. The price realisation for Nalcos CG grade ingot fell from Rs 64,450 in October 1995 to Rs 61,650 per tonne in September 1996. High power tariffs and freight charges together with low international prices of alumina and aluminium pressurised Indals profit margins.

Consequently, the three aluminium majors showed a 2.4 per cent decline in sales turnover during 1996-97. Nalco registered a 1.5 per cent rise in sales turnover at Rs 1769.4 crore owing to debottlenecking of its plant.

Hindalcos sales fell by 7.6 per cent to Rs 1157 crore on poor first half results. Indals 2.5 per cent decline in sales turnover at Rs 1158 crore was attributed to the closure of the companys Alupurqam smelter at Kerala for three months due to power problems.

The sluggish price trend for aluminium on the LME resulted in lower price realisation for domestic companies. All three aluminium majors reported a decline in profits at operating, gross and net level.

While Nalcos net profit fell by 10.6 per cent to Rs 478.8 crore, Indals slumped by 48.2 per cent to Rs 59.2 crore. However, Hindalcos net profit fell marginally by 2.5 per cent to Rs 391 crore.

Nalco has an investment plan of Rs 3,964 crore for future growth. It has proposed an expansion of its bauxite mines capacity from 24 lakh tonnes to 48 lakh tonnes and alumina refinery from 8 lakh tonnes to 15.75 lakh tonnes at an investment of Rs 1,665 crore.

An expansion of the aluminium smelter capacity from 2.3 lakh tonnes to 3.45 lakh tonnes and captive power plant from 6x120 mw to 8x120 mw at an estimated cost of Rs 2,318 crore is on anvil.

Hindalco plans to modernise and expand its capacities at a capital outlay of Rs 1800 crore. The company has already spent Rs 540 crore and proposes to spend Rs 527 crore this year. In 1998, Hindalco will spend Rs 612 crore and the balance Rs 121 crore in 1999.

It is also setting up a 5,000 tpa aluminium foil plant at Silvassa. Hindalco proposes to set up a greenfield 2.5 lakh tonnes aluminium smelting project in the near future.

Indian Aluminium (Indal) plans to spend Rs 160 crore in the current year to set up a caster for coils at the Hirakud plant and upgradation of mills at Taloja and Belur.

The aluminium majors are pinning their hopes on the future. The indications are that the current year may turn out to be a better one for domestic aluminium majors.

With the firming up of aluminium prices to over $1600 per tonne on the LME from a low of $1280 per tonne in October 1996, domestic aluminium prices also have gone up by an average of over Rs 5000 per tonne in the current year.

The rise in import duty on aluminium to 20 per cent from 10 per cent has added Rs 5,000 per tonne to the landed cost of aluminium.

The LME prices are expected to rule around $1700 per tonne in 1997-98 and may impart a bullish note to the domestic aluminium prices in the near future.

Yet, it seems the bourses have already discounted the bright prospects of the aluminium industry. The Hindalco scrip shot up to Rs 965 from a 52-week low of Rs 520 and Nalco gained Rs 44 from the 52-week low of Rs 20.