Aluminium Sector Analysis Report 

• The most commercially mined aluminium ore is bauxite, as it has the highest content of the base metal. The primary aluminium production process consists of three stages. First is mining of bauxite, followed by refining of bauxite to alumina and finally smelting of alumina to aluminium. India has the fifth largest bauxite reserves with deposits of about 3 bn tonnes or 5% of world deposits. India’s share in world aluminium capacity rests at about 3%. Production of 1 tonne of aluminium requires 2 tonnes of alumina while production of 1 tonne of alumina requires 2 to 3 tonnes of bauxite.
• The aluminium production process can be categorized into upstream and downstream activities. The upstream process involves mining and refining while the downstream process involves smelting and casting & fabricating. Downstream-fabricated products consist of rods, sheets, extrusions and foils.
• Power is amongst the largest cost component in manufacturing of aluminium, as the production involves electrolysis. Consequently, manufacturers are located near cheap and abundant sources of electricity such as hydroelectric power plants. Alternatively, they could set up captive power plants, which is the pattern in India. Indian manufacturers are the lowest cost producers of the base metal due to access to captive power, cheap labour and proximity to abundant supply of raw material, i.e., bauxite.
• The Indian aluminium sector is characterised by large integrated players like Hindalco and National Aluminium Company (Nalco). The other producers of primary aluminium include Bharat Aluminium (Balco), a subsidiary of Vedanta Resources.
• Aluminium offers a rare combination of valuable properties. It is three times lighter than Iron but is almost as strong as steel, extremely flexible and corrosion resistant due to thin surface layer of aluminum oxide. Aluminum has been continuously finding new applications due to rising price competence, superior weight to strength ratio, corrosion resistance, formability, dampness etc.
• On the industrial side, aluminium is heavily used in electrical power transmission, machinery and equipment, and construction. Housing, in particular, makes heavy use of the lightweight material as a substitute for steel and wood in doors, windows and siding. On the consumer side, aluminium is used in a variety of retail products, including cans, packaging, air conditioners, furniture and vehicles.

• Supply
• Supply of aluminum is in excess and any deficit can be imported at low rates of duty. Currently, the demand is stable while supply is in excess.
• Demand
• Demand for aluminium is estimated to grow at 6%-8% per annum in view of the low per capita consumption in India. Also, demand for the metal is expected to pick up as the scenario improves for user industries, like power, infrastructure and transportation.
• Barriers to entry
• Large economies of scale. Consequently, high capital costs.
• Bargaining power of suppliers
• Most domestic players operate integrated plants. Bargaining power is limited in case of power purchase, as Government is the only supplier. However, increasing usage of captive power plants (CPP) will help to rationalize power costs to a certain extent in the long-term.
• Bargaining power of customers
• Being a commodity, customers enjoy relatively high bargaining power, as prices are determined on demand and supply.
• Competition
• Competition is primarily on quality and price, as being a commodity, differentiation is difficult. However, the recent spate of consolidation has reduced the competitive pressure in the industry. Further, increasing value addition to aluminium products has helped some companies protect themselves from the high volatilities witnessed in this industry.

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• In FY17, Aluminum LME was on the upward trend compared to FY16. Premium in FY17 remained at low levels. Premiums started to recover from November 2016 due to supportive demand and price outlook and low inventory level in LME warehouses.
• Global Aluminum demand excluding China grew by 3% in 2016 compared to the earlier year. In China, it rose by 7% in 2016 on the back of stimulus provided by the government. The overall global Aluminum consumption touched around 60 MT, registering a growth of 5.0% in 2016 over 2015. China continues to be the largest consumer of metal, accounting for over 50% of the total global consumption.
• The growth in global primary aluminium production significantly moderated to around 3.5 percent in CY16 from 5.5 percent in CY15. Large-scale production curtailment in the U.S. was the major cause of the production slowdown in CY16.
• In FY17, LME was on an upward trend as compared to FY16. The trend was supported by firm global demand, acceleration in cost of production driven by higher coal and alumina prices. Further, Chinese cost escalations accentuated due to logistical bottlenecks, which impacted local availability of raw materials like coal and alumina.
• In the Indian market, primary aluminium production maintained robust growth momentum for the third consecutive year in a row. In FY17, production registered a growth of 17% as compared to 19% in FY16 and 18% in FY15.

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• The Domestic Demand for aluminum in India is expected to benefit from the Infrastructure projects prioritized by the government. The government’s thrust on the power which sector is the dominant consumer of aluminum in India, augurs well for the aluminum industry.
• The Automobile and food packaging industries are also expected to stoke aluminium growth. Furthermore, rapid urbanisation should augment consumer demand, yet another positive for the sector. Moreover the per capita aluminium consumption is far below the global average. This offers a huge potential, given our demographic and economic outlook.
• Global aluminium industry is expecting further recovery in demand as major economies across the world showed signs of revival in CY16. Global demand excluding China (ROW) is likely to grow by around 4% in CY17, mainly driven by recovery in the U.S and European consumption activities.
• Effective implementation of reforms in China will be the major key driver of LME movement in FY18. Other than Chinese reforms, global inventory level, input cost, exports from China and USD exchange rate movement may influence LME price during FY18.
• On the production side, in spite of environmental led closure and supply side reforms in China, production is likely to register steady growth in CY17, due to capacity ramp-ups and restarts of smelters. Global production excluding China (ROW) is expected to grow by about 2% in CY17. Overall global market is likely to be in surplus driven by excess Chinese production in CY17. However, deficit may widen further in the world excluding China (ROW), as demand is likely to surge during the same period.
• The US demand is expected to remain strong growing at a CAGR of 4-5% over the next few years, as the housing recovery gains traction, car sales continue to improve and aluminium demand benefits from its new applications, particularly in the automotive sector.
• Western Europe is expected to grow moderately amidst economic uncertainty. The aluminium demand is expected to grow around 2.5%. Asia and Middle East are expected to register around. 5-6% growth in consumption on a relatively smaller base.

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Related Links for Aluminium Sector
Quarterly Results | Sector Quote | Over The Years