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 categorised 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 Indian Aluminium (Indal), now merged with Hindalco, and Sterlite Industries.
• The per capita consumption of aluminium in India continues to remain abysmally low at1.2 kg as against nearly 15 to 18 kgs in the western world and 10 kgs in China. This offers significant upside potential. The key consumer industries in India are power, transportation, consumer durables, packaging and construction. Of this, power is the biggest consumer (about 48% of total) followed by infrastructure (20%) and transportation (about 10% to 15%). However, internationally, the pattern of consumption is in favour of transportation, primarily due to large-scale aluminium consumption by the aviation space.
• The metal has a long working life due to its propensity for recycling. Recycled metal requires significantly less amounts of energy for manufacturing of primary aluminium. Just to put things in perspective, the recycling of aluminium scrap requires 5% of the energy required for primary smelting, which is astoundingly lower, considering that power is such a high cost component.

• Supply
• Supply of aluminum is in excess and any deficit can be imported at low rates of duty. Currently, domestic production comfortably meets domestic requirements.
• 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 rationalise 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 CY 2010, the world aluminium consumption stood at around 41 Million tonnes (MT), a sharp increase of over 20% over 34 m tonnes consumption in CY 2009. The CY10 production stood marginally higher at 42 m tonnes against production of 38 m tonnes in CY 09. The sharp rise in demand was the result of strong recovery in the emerging market demand and primarily restocking led growth in developed markets. A sharp turnaround in the end user segments such as automobiles, industrial and infrastructure and thrust on power sector growth propelled the aluminium industry growth.
• In FY11, LME average aluminium prices remained strong at around USD $2,250 an increase of over 21% over previous year's average prices. The appreciating rupee though negated some of the LME price gains for domestic aluminium producers as the prices are dollar denominated. The prices continued to rise even as inventory levels remained at their historic highs. This was the result of tightness in the physical market, with most inventories tied up at various warehouses under financing deals.
• Across the globe, the cost of production of aluminium increased sharply as input costs such as alumina and power surged.

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• In CY11, the global aluminium demand is expected to remain strong and is expected to increase by around 9% reaching to almost 45 m tonnes. The Chinese demand is expected to rise by a healthy 11%. In India, the demand is expected to increase at almost 14% with an improvement in industrial activity and automobile growth. Over the medium term, thrust on power sector spending will spur the aluminium demand.
• Aluminium production is expected to increase in line with the demand. The market surplus is going to continue for a while. Strong prices have led many smelters to restart their production in last one year.
• The greatest challenge facing the industry is the continuous increase in raw material prices which are showing no signs of going down. Most input costs such as fuel oil, coal tar pitch, and caustic soda have increased along with the freight costs. Alumina costs for non integrated smelters have gone up and may increase further.
• Aluminium inventories across the globe are near all time high. But most of these inventories are reportedly bound in financing deals and are not expected to flood the market. The long term fundamentals are strong and the surplus is expected to reduce significantly in the near future.

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