Aluminium Industry Report India

Aluminum Industry Analysis Report in India

 

Global aluminium demand to witness a revival in 2010

The economic slowdown, which has affected global aluminium demand, has been particularly severe in developed economies such as the US, Europe and Japan. The slump in end-user demand in these regions is expected to result in demand contraction of 3-5 per cent [year-on-year (y-o-y)] in 2009. Demand, though, is likely to improve from 2010 onwards on the back of a marginal recovery expected in the developed regions and moderate growth in China. Mirroring this trend, prices are expected to remain subdued in the near term, increasing from 2010 onwards.

However, aluminium demand in India is expected to be relatively resilient vis-à-vis global demand, growing moderately over the next 5 years. Captive access to raw materials and lower cost of production will help Indian aluminium players mitigate lower price realisations and remain profitable over the next 2 years.

Aluminium prices to decline sharply in 2009; recover slightly in 2010

Global aluminium demand is expected to grow at a slower rate of 2-3 per cent between 2009 and 2013 as compared to the 6-7 per cent growth rate recorded in the previous 5 years. Following the subdued demand expected in 2009, demand is likely to rebound from 2010 onwards on the back of recovery expected in the automobile and construction segments in the developed economies. China, the largest consumer of aluminium, is likely to witness a marginally positive growth trajectory in 2009, and is expected to drive global aluminium demand.

The slowdown in demand has forced players across the globe to curtail production, translating into lower operating rates in the near-to-medium term. Thus, slow demand growth, lower operating rates and the expected fall in raw material (alumina, caustic soda etc) prices is expected to keep aluminium prices muted over the next 2 years. Prices are expected to average $1,500-1,600 per tonne in 2009, slightly recovering in 2010 to $1,600-1,700 per tonne. Likewise, the domestic landed cost of aluminium is also expected to decline and average Rs 89,500-90,500 per tonne in 2009-10, increasing thereafter to Rs 91,000-90,500 per tonne in 2010-11.

Domestic demand to grow by 5-6 per cent in the long term

In India, the economic slowdown has had an adverse effect on end user segments of aluminium, though the extent was lower as compared to the developed countries. This was due to steady demand from the power sector which drives Indian aluminium demand. Going forward, with the revival in growth in the automobiles and construction sectors, and continuing demand from the power sector, domestic demand during 2009-10 to 2013-14 is expected to grow at a CAGR of 5-6 per cent. Also, the exportable surplus is expected to significantly increase during the same period because of huge capacity additions by the Indian aluminium players. (Domestic aluminium capacity is likely to increase from around 1.3 million tonnes in 2008-09 to around 4.0 million tonnes in 2013-14.) However, we believe Indian players will be able to export the surplus as they lie on the lowest quartile of the global cost curve.

Profitability of domestic players to be stable in 2009-10

Although domestic aluminium prices are expected to decline significantly in 2009-10 (as compared to 2008-09) due to the expected drop in raw material costs and other operating costs, EBIT margins of domestic aluminium players is not likely to fall sharply. EBIT margins of the aluminium sector in 2009-10 are expected to remain relatively stable (17-19 per cent) and improve slightly in 2010-11 (19-21 per cent) because of the expected improvement in aluminium prices.

Introduction

The global economic slowdown, which has affected developed countries since the second half of 2008, has rippled across developing countries as well. However, the magnitude of the impact on developing countries has been relatively mild as can be seen from the performance of China and India. While the developed countries are witnessing negative growth in key aluminium consuming segments, developing countries like India recorded a slowdown in growth in key aluminium consuming sectors. Nevertheless, the performance of the Indian aluminium players cannot be assessed solely on domestic demand growth. This is because domestic aluminium prices have strong linkages to global aluminium prices, thereby making it vital to understand and assess the future of the global aluminium industry.

Therefore, in the subsequent sections we have taken an in-depth look at the global aluminium industry. The overall global demand has been forecast by assessing the performance of key consuming segments in each of the top consuming regions such as China, the US, Europe and Japan. CRISIL Research has also looked at the previous capacity additions and expected additions over the next 5 years in order to project operating rates. The expected demand-supply scenario and a detailed analysis of input prices have been used to forecast aluminium prices between 2009 and 2013. The aluminium prices have then flowed into projecting aluminium prices in India.

In order to determine the profitability prospects of Indian players we have similarly looked at in detail the end user sectors to forecast long term aluminium demand in India, and the cost of production has been analysed based on our understanding of domestic raw material prices.

Global demand

In this section we have reviewed the major consuming regions such as China, North America, Europe and Japan in order to assess key triggers that led to the imbalance in demand-supply across the global aluminium industry. Further, based on the expected performance of the key end user industries and the economic growth expected in each of these regions, we have forecast global demand growth by key regions over the next 5 years.

Aluminium demand turned negative for the first time since 2001

Aluminium consumption reported a healthy CAGR of 8-9 per cent between 2004 and 2007. In 2008, though the first half showed positive growth across all end user sectors of aluminium, the year ended with negative demand growth of around 1 per cent. This fall in demand was the first since 2001 when demand fell by around 5 per cent. This was mainly due to the economic slowdown which affected growth in the developed countries since September 2008. The demand from key consuming sectors such as automobiles, consumer durables and construction slowed significantly, thereby reducing demand for aluminium during the second half of 2008. This decline in consumption during the second half of 2008 increased inventories at the warehouses of the London Metal Exchange (LME), putting downward pressure on prices.