The power and automobile segments are expected to propel a slight recovery in domestic aluminium demand in 2014-15 after it shrank in 2013-14 on the back of stifled demand from these key end-user sectors, but profitability of domestic players will remain under pressure due to high input costs.
India’s demand for aluminium has generally remained stable due to its dependence on the power sector, which has always experienced steady growth in the past.
During 2008-09 to 2013-14, for instance, demand for the metal (which grew at 7.9 per cent CAGR (compounded annual growth rate) during this period) was powered by 8-9 per cent annual growth in demand from the power sector.
Nearly 40 per cent of domestic demand for the metal comes from the power sector, which, along with automobiles and construction, accounts for 75-80 per cent of domestic aluminium consumption.
But, in 2013-14, a fall in demand for power cables and conductors coupled with negative demand growth in auto (mainly cars and utility vehicles, and commercial vehicles) led to a 2-3 per cent decline in domestic aluminium demand for the first time ever. Compounding this was lower production as output from key producers such as Nalco was severely hit by shortage of coal and unavailability of power.
We expect domestic aluminium demand to recover slightly and grow by 2-3 per cent in 2014-15, tailing growth trends in sectors such as power and automobiles.
But the relief that players will feel on the demand front will not extend to utilisation rates. On the contrary, operating rates of Indian smelters will decline from 2013-14 due to significant capacity additions on the anvil.
Nearly 1.9 million tonnes of incremental capacity is expected to be added to the already existing 1.9 million tonnes of capacity (as of March 2014) between 2014-15 and 2018-19, the bulk of it belonging to Hindalco and Vedanta — in fact, Hindalco’s 0.35 million tonne capacity already became operational in 2013-14.
At the same time, players are cutting production due to shortage of coal linkage. None of the new smelters operational or under construction (Mahan, Aditya, and Korba) have domestic coal linkages in place, which will increase their cost of production compared to existing plants. The Korba smelter is also suffering from lack of access to captive bauxite. In the medium-term also, lack of raw material linkages will continue to plague the new smelting capacities despite expectations of a gradual improvement in supplies.
Quite in contrast to the look-up in demand that is likely to be seen in India, global demand growth will slow down over the next few years as China shifts from an investment-led to a consumption-driven economy (which is likely to slow down investments in construction).
Global utilisation rates have been on a declining trend since 2011, as capacity additions have been fairly strong and demand growth has been insipid. In China alone, close to 9 million tonnes of capacity were added between 2011 and 2013. Consequently, global utilisation rates have plummeted from 96 per cent in 2011 to 88 per cent by 2013.
We foresee the global demand-supply situation stabilising in 2014 as players are expected to undertake production cuts across regions due to rising input costs and low prices. Cumulatively, 1.2-1.5 million tonnes of capacity is expected to shut down in 2014, over and above the nearly 1.6 million tonnes of global production cuts between 2011 and 2013.
The continued capacity curtailment will provide some support to aluminium prices, which have come under acute pressure of late. We expect the average effective aluminium price (prices on the London Metal Exchange plus premiums) to be around $2,100 a tonne in 2014 (increase of 2 per cent over 2013 levels).
As far as Indian players are concerned, there won’t be much respite on the profitability front. Earnings before interest and tax (EBIT) margins of Indian players are estimated to fall by a steep 250 basis points in 2013-14, and will continue to remain under pressure in 2014-15 due to higher input costs.
In the long-term, domestic aluminium players will have to focus on exports to maintain utilisation rates, which will be a challenge in the face of the tepid global demand. That makes it even more imperative for domestic players to secure raw material linkages and be cost-competitive. Otherwise, Indian players are staring at a prolonged period of low profitability.
The author is Director, Crisil Research,
a division of Crisil