19149792 Indian Aluminium Industry

8/7/2019 19149792 Indian Aluminium Industry

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Research Paper

On

Indian Primary Aluminium Market


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TABLE OF CONTENT

1. Introduction on Aluminium2. Research Overview3. Global Aluminium Industry

1. Global Production2. Global Consumption3. Top Global Companies in Primary Aluminium

4. Indian Aluminium Industry1. History2. Features of Indian Aluminium Industry3. Primary Aluminium Production4. Consumption

5. Analysis of Indian Primary Aluminium Market1. Type of Market2. Profile of Key Players3. Reasons of Indian Aluminium Industry being an Oligopoly4. Porters Competitive Framework

6. Pricing of Primary Aluminium7. Conclusion

1. Challenges Ahead2. Outlook

8. References


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INTRODUCTION

Global society faces a great challenge to shift human economic activity and lifestyles

on to a sustainable path in the 21st century, including meeting threats from climatechange. The story of the aluminium industry over the decades ahead must be one of

how it is part of the solution for a sustainable future. The metal aluminium has a vital

role to play in successfully addressing this sustainability challenge.

Aluminium is the third most abundant element in the earth's crust and constitutes

7.3% by mass. The existence of was first established in 1808 but there were a few

historical mentions of aluminium use. The aluminium metal was extracted from the

ore after many years of research. It was possible only in the year 1854 to develop a

viable commercial production process of aluminium. Primary aluminium is the hot

molten metal that is produced in the smelter. Secondary aluminium is the finished

goods made from primary aluminium.

Aluminium is a young material, and in the little more than a century since its first

commercial production, it has become the worlds second most used metal after

steel. The demand for aluminium products is increasing year by year, so why is

aluminium a metal in such demand and what is its role in the lives of future

generations?

Why Aluminium?

Modern life is full of advantages brought about by the use of aluminium.

Some of the major benefits of this unique metal are:

Strength

Pure aluminium is soft enough to carve but mixed with small amounts of other

metal to form alloys, it can provide the strength of steel, with only one-third of the

weight.


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Durability

Aluminium sprayed on a polymer forms a thin insulating sheet.

Flexibility

Its combination of properties ensure aluminium and its alloys can be easily

shaped by any of the main industrial metalworking processes - rolling, extrusion,

forging and casting.

Impermeability

Aluminium has excellent barrier function which makes it ideal for food and drink

packaging and containers. It keeps out air, light and microorganisms while preserving

the contents inside.

Lightweight

Aluminium used in transport reducing the weight of the vehicles, hence in

providing fuel efficiency, reducing energy consumption and greenhouse gas

emissions.

Corrosion-resistant

The metal's natural coating of aluminium oxide provides a highly effective

barrier to the ravages of air, temperature, moisture and chemical attack, making

aluminium a useful construction material.

Recyclable

Once made, aluminium can be recycled again and again, using only a very small

fraction of the energy required to make "new" metal. Recycling saves about 95% of

the energy required for primary production.


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Other

Aluminium is a superb conductor of electricity which has seen it replace copper

in many electrical applications. It is also non-magnetic and non-combustible,

properties invaluable in advanced industries such as electronics or in offshore

structures.


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THE OBJECTIVE OF THE RESEARCH IS

1. To study the global as well as domestic production and consumption patterns.2. To study the type of Indian Primary aluminium markets and its key players.3. To study the reasons for the primary aluminium market being an Oligopolistic

market and the barrier to entry.


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RESEARCH METHODOLOGY

Aluminium is the second most important metal after steel. The Indian economy is

growing at a consistent rate of about 8% and due to this there is an increase in the

domestic demand for the metal which is most widely used in various sectors for

various purposes.

The interesting part about the topic Indian Primary Aluminium Market is that even

though there is a huge growth in demand for the metal both in domestic market as

well as in the international market which is mainly driven by China. The production

of primary aluminium in India is dominated by the old players; there has been no new

entrant into the market including the major metal industries like ArcelorMittal etc.

This makes the research interesting.

The objective of the research is


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GLOBAL ALUMINIUM INDUSTRY

Global Production

Global production of primary aluminium rose from 32 million tons (MT) in2005 to 34 MT in 2006, a jump of 6%. In 2007, it further increased to 38 MT, an

increase of 12% YoY. China alone accounted for 29% of global primary aluminium

production.

Primary aluminium production is concentrated in relatively few countries.

China alone produced 26 percent of the world total in 2006.The top five producers

China, Russia, Canada, the United States, and Australiaaccounted for 59 percent of

world output that year. Production is found where energy is cheap because making

aluminium uses large quantities of electricity. The worlds largest aluminium smelter,

now being planned for construction in Dubai, will have its own 2,600 -megawatt

power plant.

Aluminium Producing Countries

The ore of the metal i.e. bauxite generally occurs in the tropical and sub

tropical areas of earth and is present in almost all continents except Antarctica with

the estimated deposits of 65 billion tons. The major producers of primary aluminium

in the world are

y United States of Americay Russiay Canaday European Uniony Chinay Australiay South Africay Venezuelay Bahrainy United Arab Emiratesy Indiay New Zealand


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The gl l production of aluminum figures around 38 million tons and the above-

mentioned countries share more than 90% of the aluminium production. China and

India reported the greatestincreases in aluminium output at 12 percent and 11 percent

respectivel .

(The above chart shows the Global Aluminium Production from 1997-2007)

Country 2001 2002 2003 2004 2005 2006

China 3371 4321 5547 6689 7806 9349

Russia 3302 3348 3478 3594 3647 3718

Canada 2583 2709 2792 2592 2894 3051

USA 2637 2705 2705 2517 2480 2281

Australia 1797 1836 1857 1895 1903 1932

Brazil 1132 1318 1381 1457 1498 1604

orway 1068 1096 1192 1322 1377 1427

India 624 671 799 861 942 1105

S. Africa 654 704 733 864 851 887

Bahrain 522 517 526 524 708 844

Source: ABARE


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Global Consumption

Asia showed the largest annual increase in consumption of primary

aluminium, driven largely by increased industrial consumption in China, which has

emerged as the largest aluminium consuming nation, accounting for 30% of global

primary aluminium consumption in 2007. As far as global consumption is concerned,

it increased by 8.2% in 2006 and touched 34.7 MT. In 2007, the corresponding figures

were 10% and 37.8 MT respectively.

Globally, newer packaging applications and increased usage in automobiles

is expected to keep the demand growth for aluminium over 5% in the long-term. Asia

will continue to be the high consumption growth area led by China, which is expected

to continue to register double-digit growth rates in aluminium consumption in the

medium-term.

The following are the various applications areas of Aluminium.

1. Transportation2. Construction3. Packaging4. Electrical5.

Engineering

6. Consumer Durables


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(The sector wise global consumption pattern of Aluminium)

We observe from the above graph that 29% of all Aluminium is consumed by the

transportation sector. This is because of the boom in the aviation and automobile

industry. As Aluminium is a complementary to steel, the consumption for aluminium

has substantially increased.

Aluminium is the second most consumed metal on the earth, and is consumed

and produced more than all non-ferrous metals combined together. By 2030, it is

expected that primary aluminium consumption will cross more than 70,000 kilo

tonnes (KT). At the beginning of this century, consumption was at 25,059 KT and

since then it has grown steadily mainly on demand from Asia and in particular China.

The total global consumption of aluminium stood at 33,970 KT in 2006 and has

reached 37,800 KT in 2008. The overall demand saw a drop only in the 2001 when

consumption was at 23,722 KT.

29%

22%15%

12%

9%

9%

4%

%age of comsumption

Transportation

Construction

Packaging

Electrical

Engineering

ConsumerDurables

Others


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World's Top Ten Primary Aluminium Consuming Countries (in KT),

2001-06

Country 2001 2002 2003 2004 2005 2006

China 3492 4115 5178 6043 7119 8648

USA 5230 5509 5667 5800 6114 6150

Japan 2014 2010 2235 2319 2276 2323

Germany 1580 1690 1916 1795 1759 1823

S. Korea 850 921 982 1118 1201 1153

India 589 604 798 861 958 1080

Russia 786 990 803 1020 1020 1047

Italy 756 851 956 987 977 1021

Canada 743 747 736 755 801 846

Brazil 553 578 589 651 759 773

Source: ABARE

The country-wise pattern of primary aluminium consumption shows China's position

as pre-eminent consumer. China is followed by the US, Japan, Germany, South

Korea, India, Russia and Italy. The presence of four Asian countries viz, China,

Japan, South Korea and India, clearly explains why Asia leads in the global

consumption of primary aluminium.


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TOP MAJOR PLAYER IN ALUMINIUM INDUSTRY

1. ALCOA2. RUSAL3. ALCAN4. HYDRO5. BHP Billiton6. CHALCO7. DUBALCO


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INDIAN ALUMINIUM INDUSTRY

The Indian aluminium sector is characterised by large integrated players like Hindalco

and National Aluminium Company (Nalco). The other producers of primaryaluminium include Indian Aluminium (Indal), now merged with Hindalco, Bharat

Aluminium (Balco) and Madras Aluminium (Malco) the erstwhile PSUs, which have

been acquired by Sterlite Industries. Consequently, there are only three main primary

metal producers in the sector namely Balco (Vedanta), National Aluminium Company

(Nalco) and Hindalco (Aditya Birla Group).

History

Aluminium production in India commenced in 1938 with the commissioning of

Aluminium Corporation of India's (Indal) plant in technical and financial

collaboration with Alcan, Canada having a capacity of 2,500 ton per annum. The plant

started with sheet production using imported aluminium ingots.

In 1959, Hindustan Aluminium Corporation (Hindalco) was set up at Renukoot in UP

with an initial capacity of 20,000 ton per annum. Malco, a public sector undertaking

was commissioned in 1965 with a capacity of 10,000 ton per annum. This was

followed in 1975 by Balco, a PSU with a similar capacity of 10,000 ton. Finally in

1987, National Aluminium Company (Nalco) with a capacity of 0.218mn ton was

commissioned in technical collaboration with Pechinery of France.

In the 1970s, the government regulated and controlled the aluminium industry through

price distribution controls and barriers to entry. The 1970 Aluminium Control Order

compelled the Indian companies to sell 50 % of the aluminium produced for electrical

purposes.

The government decontrolled the industry in 1989 with the removal of the Aluminium

Control Order. The industry was de-licensed in 1991 and was allowed liberal import

of capital goods and technologies.


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The demand for aluminium grew 6 % in the 1980. Aluminium demand post

liberalization registered a growth rate of 12%. This coupled with the increase in the

global aluminium prices ($1800/ ton in 1994) led to increased investments in this

sector.

The downstream capacity in the aluminium industry spurted due to sufficient duty

differential between aluminium ingots or primary metal and value added downstream

products. In March 1993 while the duty on aluminium ingots was 25% the duty on

downstream products was 70%. However with the change in the tariff structure

undertaken in the 1997 budget, duty on semi-fabricated metal was lowered to 25%.

This change adversely affected the fortunes of the downstream producers.

Features of Indian Aluminium Industry

y Highly concentrated industry with only five primary plants in the country.y Controlled by two private groups and one public sector unit.y Bayer-Hall-Heroult technology used by all producers.y Electricity, coal and furnace oil are primary energy inputs.y All plants have their own captive power units for cheaper and un-interrupted

power supply.

y Energy cost is 40% of manufacturing cost for metal and 30% for rolledproducts.

y Plants have set internal target of 1 2% reduction in specific energyconsumption in the next 5 8 years.

y Energy management is a critical focus in all the plants.y Two plants have declared formal energy policy.y Each plant has an Energy Management Cell.


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Primary Aluminium Production

India is considered to be the fifth largest producer of Aluminium in the world. It

accounts to around 5% of the total deposits and produces about 0.8 million tons of

aluminium. It is estimated that if the countrys aluminium consumption ratemaintains, itd be having the reserves for over 350 years. India has confirmed 3 billion

tonnes of Bauxite reserves out of the global reserve of 65 billion tonnes. The

worldwide alumina production competence is around 58 million tonnes in which India

has 2.7 million tonnes. Most of the bauxite mines lie in Bihar, Karnataka and Orissa.

In India, the production of aluminium is highly concentrated and is in the hands of the

following three companies

y Bharat Aluminium Co. Ltd (BALCO)y National Aluminium Co. Ltd (NALCO)y Hindustan Aluminium Co. Ltd (HINDALCO)

India is the eighth leading producer of primary aluminium in the world. The Ministry

of Mines, Government of India puts the production target for the year 2007-08 at

1,237 KT, an increase of 84 KT from previous year's 1,153 KT. The production of

aluminium in India has grown substantially in last five years. Production got a boost

due to adding of extra smelting capacity in recent years and rising domestic demand

emanating from packaging, construction, automobiles and electrical sectors. India's

contribution in global aluminium production is less than 5 per cent despite having 7.5

per cent of the world's total bauxite deposits and 7 per cent of bauxite production.


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Consumption

The consumption of primary aluminium has risen sharply since 2002 and reached

1,080 KT by 2006. From the end of the 1990s till 2002, the consumption remained

almost stagnant, around 500- 600 KT. The reason for this growth after 2002 lies in the

demand generated from automobile, construction and packaging sectors.

The per capita consumption of aluminium in India continues to remain abysmally low

at under 1 kg as against nearly 25 to 30 kgs in the US and Europe, 15 kgs in Japan, 10

kgs in Taiwan and 3 kgs in China. The key consumer industries in India are power,

transportation, consumer durables, packaging and construction. Of this, power is the

biggest consumer (about 44% of total) followed by infrastructure (17%) and

transportation (about 10% to 12%). However, internationally, the pattern of

consumption is in favour of transportation, primarily due to large-scale aluminium

consumption by the aviation space.


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(The sector wise Indian consumption pattern of Aluminium)

(The above chart shows the consumption of Primary Aluminium in India)

22%

13%

11%

36%

6%8%

4%

%age of comsumption

Tra

s

rtati

str cti

Packagi g

Electrical

E

gi

eeri

g

s mer Durables

Others


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Analysis of Indian Aluminium Market

Type of Market

The primary Aluminium production market in India is an oligopolistic market. The

primary aluminium is a homogenous product. As the product is homogenous we can

term the market as Pure Oligopoly. Though there are some grades in aluminium

based on aluminium concentration like EC (Electrical conductivity) Grade, etc but

there are very less difference in the quality of the product. There is little or no gap

between the demand and supply as the supply just matches the demand. Moreover

there is a huge demand from countries like china hence there is not constraint on the

number of consumers.

There are only 3 players in the aluminium market in India with total production of

1250 KT in 2008. The entry into market is possible but not easy due to the heavy

initial capital that is required to setup the plant. As aluminium is a homogenous

product there is no price war between the three players and these firms are price

takers. Though the company sells the product at price which is decided by them, the

firms mostly go by the price on the London Metal Exchange (LME). In the Indian

aluminium industry all the firms are price takers and there is no clear leader as all the

3 firms have almost equal market share. The price is decided by demand and supply in

the commodity market.

Profile of Key Players

Ca acity

(Kt a)

Market

Share

HINDALCO 471 39%

Sterlite

Industries

385 32%

NALCO 345 29%


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(Note: We have taken the production capacity to calculate the market share as each firm are producing

and selling to the fullest of their capacity)

The Herfindahl Index (H) for Indian Primary Aluminium Industry is 3386.

This shows that the Indian Primary aluminium market is evenly distributed among the

three players.

National Aluminium Company (NALCO)

NALCO is one of the largest integrated aluminium producers in Asia. The

Government of India (GoI) holds 87.15 per cent stake in the company. The company

has an alumina refinery at Damanjodi and a smelter at Angul in Orissa. Currently,

NALCO has undertaken a capex programme of Rs.41 billion to increase aluminium

production capacity to 460,000 tonnes from 345,000 tonnes, and also to enhance the

capacity of its mining, refining and power generation operations.

Hindustan Aluminium Company (HINDALCO)

Hindalco Industries Limited, a flagship company of the Aditya Birla Group, is

structured into two strategic businesses aluminium and copper with annual revenue of

US $14 billion and a market capitalization in excess of US $ 23 billion.

Established in 1958, Hindalco commissioned its aluminium facility at Renukoot in

eastern U.P. in 1962 and has today grown to become the country's largest integrated

HINDALCO39%

Sterlite

Industries

32%

NALCO29%

Market Share


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aluminium producer and ranks among the top quartile of low cost producers in the

world. The aluminium division's product range includes alumina chemicals, primary

aluminium ingots, billets, wire rods, rolled products, extrusions, foils and alloy

wheels. It enjoys a domestic market share of 42 per cent in primary aluminium, 63 per

cent in rolled products, 20 per cent in extrusions, 44 per cent in foils and 31 per cent

in wheels.

Hindalco has launched several brands in recent years, namely Aura for alloy wheels,

Freshwrapp for kitchen foil and ever last for roofing sheets. Hindalco Industries Ltd.

has been able to grow revenues from 121.2B to 193.2B. Most impressively, the

company has been able to reduce the percentage of sales devoted to selling, general

and administrative costs from 4.15% to 2.96%. This was a driver that led to a bottom

line growth from 15.8B to 26.9B.

The company is also believed to be keen on kick-starting its green field Aditya

Aluminium Project which envisages an alumina refinery and aluminium smelter at an

estimated cost of $1.8bn. The project includes a 1m tonne alumina refinery, a 2.5 lakh

tonne aluminium smelter and a 660 MW captive power plant.

Sterlite Industries Ltd (Vedanta)

Sterlite Industries Aluminium business comprises of two operating companies,

BALCO and MALCO. BALCO is a partially integrated aluminium producer with two

bauxite mines, one refinery, two smelters, a fabrication facility and two captive power

plants at Korba in central India. MALCO is a fully integrated producer with two

bauxite mines, a captive power plant and refining, smelting and fabrication facilities

at Mettur in southern India. The primary products are aluminium ingots, rods and

rolled products.

The smelters at BALCO and MALCO produced 380,000 tonnes in FY 2007,

marginally higher than the rated capacity. The parent company Vedanta is coming up

with a 5 lakh ton smelter in Jharsuda, Orissa. The project is in advance state and isexpected to be operational by the year 2009.


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Reasons for Indian Aluminium Industry being an Oligopoly (Barriers to Entry)

The reasons for the aluminium industry to be an oligopoly is

y Economies of Scale.The major input in producing primary aluminium is alumina and power which

constitute about70% of the cost in producing. Although the requirement of alumina

does not vary much with the size of the plant but the consumption of power varies

drastically. Hence with higher production capacity the cost of production goes down.

For a new player producing aluminium and low cost will be very difficult.

y Huge capital investments.The capital required to setup an aluminium production plant is huge. E.g.:

BALCO spent about $1 billion to set up a 2.45 lakh ton capacity with 540MW power

plant.

y Time to setup.It requires around 3 years to setup a plant of the size mentioned in the above

example. The new player would require about 3 years to start manufacture primary

aluminium and the market demand supply equation can change by the time the firm

starts manufacturing.

y Control over the Bauxite mines.As the raw material for manufacturing aluminium is bauxite the existing

players have control over the bauxite mines in India and it would be difficult for a

new player to get new bauxite mines.

y Scarcity of power.About 30-40% of the cost of producing is power. As producing primary

Aluminium requires a large amount of electricity they need to have captive power

plants. Setting up of captive power plants requires huge capital investment and also

requires a lot of time. The basic raw material to generate power is coal. Hence the

firms also would need to have coal mines. Most of the coal blocks are owned by

independent power producers and hence the coal blocks are scarce.


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y Government Factor.The other major hurdles are getting environmental clearance from the

government. The other factor would be in getting bauxite mines allotted to the firm.

Hence in these two cases the government acts as a barrier.

y Land.Existing players can expand as setting up a new brown field project is easy

than getting land allocated for a new green field project considering the political

situations in India.

y Geographical factors.The bauxite ore is abundant only in the states like Orissa and hence the firms

entering into the market need to setup the plant in these states.

Porters Competitive Framework

It represents the strategic challenges facing firm managers as they seek to

maximise profit in oligopolistic markets. Porters five structural determinants of the

intensity of competition and of the profitability of the firms in oligopolistic industry

(Indian Primary Aluminium Industry) are

1. Threat from substitute product.Copper can replace aluminum in electrical applications; magnesium, titanium,

and steel can substitute for aluminum in structural and ground transportation uses.

Composites, wood, and steel can substitute for aluminum in construction. Glass,

plastics, paper, and steel can substitute for aluminum in packaging.

2. Threat of Entry.Though there are lot of barriers to enter into the aluminium market, other

major metal players who are not into Aluminium business can enter seeing the rate of

growth of the aluminium market.


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3. Bargaining power of buyers.Even though there are few players in the primary aluminium industry the price

is determined by the demand and supply and the buyer has an upper hand and the

bargaining power of the buyer is significant.

4. Bargaining power of suppliers.India is a net exporter of Alumina and the players manufacture the alumina for

their own consumption. Hence this is not significant. As far as bauxite is concerned

the firms have their own mines but all the firms do not have their own coal mines and

depend of Coal India to supply coal to the firms.

5. Intensity of rivalry among existing competitors.All the three players have almost equal market share in India. Looking at the

global demand growth driven by china the players are eyeing the growing global

market and hence increasing the production capacity.


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United Company RUSAL is the leader of the worlds aluminium industry.

Its products are exported to clients in 70 countries of the world. The Company

incorporates bauxite and nepheline ore producers, manufacturers of alumina,

aluminium, alloys, foil and packaginging materials, as well as power assets.

The United Company holds 12.5% of the worlds aluminium market and 16% of the

worlds alumina market, which allows the company to produce 3.9 mln m.t.

of aluminium and 10.6 mln m.t. of alumina per annum. The company was established

in March 2007, as a result of merger of RUSAL, SUAL and alumina assets

of Glencore. UC RUSAL provides employment for 100,000 individuals and is

operating in 17 countries on 5 continents.

Alcoa is one of the worlds leading manufacturers of primary aluminium, aluminium

products and alumina. The company is involved in aerospace, automotive, packingand construction industries, as well as in the field of commercial transportation

and engineering solutions. Alcoa has 129,000 employees in 44 countries of the world.

In 2006 the company has produced 3.55 mln m.t. of primary aluminium. In Russia,

Alcoa owns OJSC Samara Metallurgical Plant and OJSC Belaya Kalitva

Metallurgical Industrial Amalgamation.

lcan is the Canadian aluminium manufacturer, which is over 100 years old. Today,

the company is one of the leaders in the worlds aluminium industry, producing

bauxites, alumina and aluminium. It is one of the three largest manufacturers

of structural and packaging materials. Its production volume for primary aluminium

in 2006 was 3.4 mln m.t. The company has 68,000 employees, including joint

ventures. Alcan operates in 61 countries. In Russia, Alcan sells aluminium packaging

materials, including products for the tobacco and cosmetics industries. It has

representative offices in Moscow and Leningrad regions. At present, Alcans

shareholders are studying a takeover proposal from the Australian-based Rio Tinto.

If the deal is approved, the new company will become the absolute leader in termsof volume.


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Chalco or Aluminium Corporation of China Limited is the largest manufacturer

of aluminium and the only manufacturer of alumina in China. The company

was founded in 2001 during the privatization of Chinese aluminium industry.

In 2006 Chalco has produced 9.2 mln m.t. of alumina and 1.6 mln. m.t. of aluminium.

All the assets of the company 4 plants, manufacturing both alumina

and aluminium, one purely aluminium and two purely alumina plants, plus, an R&D

Institute are located in China. Chalco does not have representation in Russia.

Hydro Aluminium is one of the two main business units ofNorsk Hydro. Its second

line of business is the oil and power industry. Hydro Aluminium is a downstream-

integrated company with major alumina assets in Brazil and Jamaica, and aluminium

smelters in Australia, Canada, Germany, Norway and Slovakia. The company has also

announced its intention to build an aluminium smelter in Russia. Hydro Aluminiumhas 26,000 employees. In 2006 they have produced 1.8 mln m.t. of primary

aluminium. At present, Hydro has offices in Moscow and Saint Petersburg.

BHP Billiton is the largest mining company in the world. The company acquired

its present configuration in 2001, when it was created through the merger of the

Australian Broken Hill Proprietary Company (BHP) and the British listed Billiton.

Aluminium production is just one of ten businesses run by this Australian giant. As of

today, overall production capacities of the company are over 1 mln m.t. of aluminium

and over 4 mln m.t. of alumina per annum. BHP Billiton owns industrial sites

in South Africa, Australia and South America. BHP Billiton does not have

a representation in Russia.

Dubal or Dubai Aluminium is the largest aluminium manufacturer in the UAE.

Starting in 1979 with a single pot line, producing only 136,000 m.t.p.a., Dubal today

is one of the leaders of world aluminium industry, having production capacity

of 900,000 m.t.p.a. of aluminium. 3240 people work for the company. The main

markets for Dubal are: the FarEast, Europe, Asia, the Middle East, the Mediterranean

and North America. Dubal does not have representation in Russia.


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Rio Tinto Group is another diversified mining company among the top

ten aluminium producers in the world. It got its present configuration in 1997 after

a series of takeovers and mergers. Aluminium production is one of the groups seven

lines of business. Rio Tinto Aluminium mines bauxites, produces alumina

and primary aluminium, accounting for 26% of all aluminium, manufactured

in Australia. The head-office of its aluminium operation is located in Brisbane,

Australia, with representations in New Zealand, Australia and Great Britain. Rio Tinto

Aluminium employs 5,000 people. There is no representative office in Russia yet.

Aluminium Bahrain B.S.C. or Alba is one of the largest aluminium smelters in the

world. Since it was built in 1971 in the Knaff District ofBahrain, the smelter

has increased its production capacity from 144K to 850K m.t.p.a. of aluminium, thus

entering the Big Ten aluminium manufacturers and becoming the worlds third largestaluminium smelter. In 2006 Alba has produced 2.3% of the worlds aluminium.

Century Aluminum was founded by the Swiss company Glencore International, as a

holding for its aluminium assets, in 1995. A year later Glencore completed an IPO

of Century Aluminium stock, leaving a 30% package. The company employs

1,750 people. It controls or holds shares of several aluminium smelters in the US and

Iceland, as well as a number of mining assets in Jamaica and in the US. Last year,

Century Aluminium produced 660K m.t. of aluminium, which accounts for 1.9%

of the worlds production. Its head-office is located in Monterey, CA. Century

Aluminium has no representation in Russia.


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Pricing of Primary Aluminium

The major trading centers of aluminium in the world are

y London Metal Exchange (LME)y Tokyo Commodity Exchange (TOCOM)y Shanghai Futures Exchange (SHFE)y New York Mercantile Exchange (NYMEX)

These above mentioned commodity exchanges provide direction to the world

aluminium prices. In India, aluminium is also traded at various commodity exchanges

namely Multi Commodity Exchange of India and National Multi Commodity

Exchange of India.

Aluminium traded at around US$2,000 per tonne in the beginning of 1980 and since

then witnessed a declining trend till 1986. The price plummeted to as low of US$919

per tonne in June 1982. The prices hovered around US$1,200-1,400 per tonne

between 1982 till the middle of 1987. The prices breached 2000 US$ per metric tonne

barrier in January 1988 and in the month of June reached an all time record-high of

US$3,578 per tonne mainly on account of supply constraints in the world market. The

late 1980s and early 1990s again saw a slump in prices due to collapse of USSR and

resulting flood of aluminium into the world markets by the CIS countries, followed by

an upswing in prices mid-decade and a declining trend again at the end of the decade.

Post 2000, prices have stayed at US$1,200-1,400 per tonne level. In the past three

years, the prices have shown an uptrend and have traded above US$2,000 per tonne.

The other factors for the variation in the price of aluminium in the past two years are

price of crude oil which increased from $70 per barrel to over $100 a barrel and

fluctuation of INR. The rising crude prices resulted in higher prices for its derivatives.

The soaring crude also had a cascading effect in terms of higher transportation costs

and higher prices of alternate energy sources like coal. All these led to a significant

cost push for the aluminium industry. The depreciating dollar resulted in a sharp fall

in domestic aluminium realizations as the prices are dollar denominated. Continuing

with the stated policy of import duty reduction, the government cut the customs duty

on aluminium. The effective import duty for aluminium declined from 8.1% to 5.7%.


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As a result of these macro economic factors, average aluminium realisations for FY08

declined sharply by11% as compared with FY07 realisations.


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CONCLUSION

Challenges Ahead

1. A long-term decline in the real price of Aluminium will erode margins of thefirms manufacturing primary aluminium.

2. Pressures to improve return on investment.3. Maturing of terminal markets such as the London Metals Exchange (LME) as the

firms are price takers and have little scope to decide the price.

4. Technological changes particularly on the upstream side. There has been noalternate method developed to extract metal from the ore.

5. Intense competition from other materials such as steel and plastics which are thesubstitutes to aluminium.

6. Need to respond to the changing demands of global customers, such asautomakers and can manufacturers.

7. Reduce the consumption of electricity consumed in producing aluminium i.e.increase the energy efficiency.

8. Reducing the greenhouse gas emissions and PFC from the production process.


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Outlook

The world aluminium market is expected to have a surplus of about 500 KT in the

year 2008 due to the rapid increase in production activities and slightly lesser pace of

growth in aluminium demand. The world aluminium production is expected to reach

40,400 KT against the expected demand of 39,900 KT in 2008 thus likely to affect the

aluminium prices in the short run. The high energy prices are a major concern and

may provide some support to prices in between or may also result in slight reduction

in the anticipated surplus. In the long term, increasing demand from Asia might

benefit aluminium price. Increasing income levels in India, for instance, are inducing

higher demand from the automobiles and construction sectors, thus promising a better

future for aluminium in the domestic market.


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References

1. www.commoditywatch.com2. www.metalworld.co.in3. www.equitymaster.com4. www.crnindia.com5. www.nalco.com6. www.hindalco.com7. www.vedantaresources.com8. www.indiainfoline.com9. London Metal Exchange Website10.International aluminium Institute website.11.Annual Reports of HINDALCO, NALCO and Vedanta (Sterlite Industries).

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19149792 Indian Aluminium Industry

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