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 FY16, the Aluminium industry witnessed significant challenges as the average realisations crashed. The average aluminium LME was 16% lower than the previous year while the premiums were sharply lower by 68% as compared with FY15.
• The LME prices continued to remain depressed till 2015 end. However, restocking in China after the New Year and certain stimulus measures in China led to sudden improvement in sentiments and the prices have started recovering since then.
• The calendar year 2015 witnessed substantial smelter closures globally, mostly in higher-cost producing areas such as Europe, the US and China. A sharp decline in LME prices coupled with crash in premium resulted in many smelters becoming unviable. However, the costs too declined sharply, especially for certain set of players due to local currency depreciation vis-à-vis USD. Currency depreciation along with energy deflation has resulted in a sharp decline in operating costs and hence the Aluminium cost curve has shifted downward.
• Towards the end of FY16, the prices of most commodities appear to have bottomed out and have rallied on the back of improved sentiments with respect to Chinese demand. This was aided by USD weakness following accommodative policies by the US Fed. However, the sustainability of these prices is so far uncertain in this challenging global macroeconomic scenario.
• The aluminium demand continued to remain strong. However, the surplus attributed to overcapacity in China has been a major hurdle in recovery of commodity price for a while. During the year, a sharp decline in realisations forced Chinese producers to curtail capacity to the tune of 4.5 million tonnes in 2015.However, the rally in aluminium prices during the last quarter of FY16 has put a question mark on these curtailments and some of the smelters have reportedly restarted.
• In the Indian context, the demand scenario was encouraging. The decline in domestic coal prices in However, imports of aluminium in various forms was a major bane for the Indian producers as imports surged in FY16.

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• The Indian aluminium demand is expected to remain robust following the steps taken by the government to boost the industrial production and infrastructure. The demand is also expected to get a boost following the focus on smart cities and improving prospects of business and construction industry.
• The other segments that are expected to see enhanced aluminium demand are automobile and food packaging industry. Rapid urbanization, as the country continues to develop towards a more consumer-focused economy, should augment consumer-driven demand and will help in sustaining strong growth in aluminium demand into the next decade.
• The global demand for primary aluminium is also expected to be robust and is likely to grow around 4.5% to around 59 million tonnes by 2016 and to 61 million tonnes by 2017.
• China, despite slowdown in the demand, will continue to be the major driver growing around 6% in 2016 and around 5% in 2017. China is expected to account for almost 53% of the global primary metal consumption in 2017, up from around 51% in 2014. The aluminium consumption pattern in China is expected to shift from infrastructure and power to packaging and automobile following the Chinese government's growth balancing efforts with increased thrust on consumer driven growth.
• 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
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