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Increasing consumption augurs well for the aluminium industry
By Dr. Uday Lal Pai
Exclusively for InvestorIdeas.com
posted October 16, 2006
India's aluminium consumption is expected to grow by 9-10% in 2006-07 fiscal. The Indian government's focus on the infrastructure sector and the growing importance of India as a global manufacturing hub for automobiles will propel aluminium growth.
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India is the fifth largest producer of aluminium in the world, accounting for around 10% of the total bauxite reserves (raw material for aluminium).
India's annual consumption of aluminium is approximately 800,000 tonne. In terms of demand and supply, India is self-sufficient and has a competitive export potential. India's annual export of aluminium is about 82,000 tonne, which makes it a net exporter of aluminium.
On the domestic front, during FY05, the country's aluminium consumption increased by 8.3% YoY. The domestic demand for aluminium, given the anticipation of a healthy growth in the country's economy, is expected to grow at 10% per annum in the next 3-4 years. By 2020, India is expected to have an installed aluminium capacity of 1.7 to 2 million tones per annum.
Aluminium Market
While globally, the automotive and construction sectors are the major end-users of aluminium, in India, the bulk of the demand is accounted for by the electrical sector, followed by automotives.
The power sector consumes about 35 per cent of the domestic production. The ongoing reforms in the power sector and focus on improving power infrastructure, is expected to further boost the aluminium sector in India.
Due to this, there was shortage of commercial grade aluminium. Since 1990, the share of demand from the electrical sector declined gradually from 37% in 1992 to 31% in 2005. Conversely, for the same period, the share of construction has increased from 7% to 13%. The share of automotive has declined from 21% to 18% during the same period.
Aluminium prices are likely to remain volatile in the near term, say market pundits. The trend will be more a direct function of global interest rate. However, the market will come back into balance by mid-2007. If that happens, aluminium prices will come off.
Entry barrier and threat of substitutes
The domestic aluminium industry is characterized by a high degree of concentration because of the various reasons. "Aluminium is a highly concentrated industry with only five primary plants in the country -controlled by two private groups and one public sector unit," say market analysts.
The major reasons are the high capital costs because of large plant sizes and high capital intensity, and restricted access to technology, tie -ups have to be entered into with global technology suppliers usage pattern. The production of primary aluminum relies on an electrolytic process and is highly electricity-intensive. Power is both the major and critical component in the production of aluminium.
Steel, wood and copper are the main substitutes of aluminium. The relatively low per tonne cost of steel, the higher aesthetic appeal of wood, and the higher conductivity of copper are some of the major factors that favor demand for aluminium substitutes. However, aluminium with properties like higher strength-to-weight ratio, durability, and higher corrosion-resistance is still able to counter competition. It is also worth mentioning that with the copper prices heading north on LME (London Metal Exchange), aluminium might emerge as a substitute for the former!
Good for retail investors
Hindalco's Managing Director Debu Bhattacharya is confident that demand for aluminium would remain strong.
Kumar Mangalam Birla, Chairman, Hindalco says:" I believe the aluminium sector is poised for good growth. The robust growth in the Asian region, led by China, would continue to drive the demand for metals. Amazing as it may seem, there has been a 21 per cent increase in aluminium consumption in China. A significant demand is forecasted from the East European countries, South Asia and parts of Africa, where demand has grown seven per cent. The transportation sector has been the strongest growth driver in North America. In Europe demand is fuelled by the robust outlook for beverage-can stock and the construction sector. In India, the domestic aluminium consumption increased by 12.7 per cent, on the back of the lectrical, transportation and construction sectors. The government's focus on the infrastructure sector will also propel aluminium growth in our country, as well as the growing importance of India as a global manufacturing hub for automobiles. Our guesstimate is that domestic aluminium consumption will grow by nine to 10 percent in FY'07. A structural shift in the global aluminium industry is likely to keep prices above historical averages."
The major two aluminium companies - Nalco, Hindalco - both are good holdings for the long-term. Keep them in your portfolio and essentially forget about them. Both are good dividend paying stocks, both are dominant players both in India as well as internationally.
Hindalco's aluminium business has also turned in an impressive performance. Firm aluminium prices and higher share of value-added products were factors behind the company's strong numbers.
Firm price trends, high operating margins and the capital restructuring exercise place Nalco on a sound footing. Riding on the back of higher aluminium and alumina prices, Nalco came out with a strong set of numbers
Major Players
HINDALCO
MALCO
NALCO
INDAL
BALCO
Disclaimer
Dr. Uday Lal Pai is an independent columnist for this web site.
Dr. Uday Lal Pai may hold long or short positions in any of the stocks mentioned in this article and those positions can change at any moment. InvestorIdeas.com Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
Dr. Uday Lal Pai is a freelance writer. Nothing in the articles should be construed as an offer or solicitation or recommendation to buy or sell any specific products or securities. Past performance does not guarantee future results.
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