Domestic aluminium to face problem of plenty in the next few years
As things stand, domestic consumption is not enough to absorb the incremental capacity of Indian aluminium manufacturers
The aluminium industry is holding on to hopes of a minimum import price (MIP). Last week, a Mint report said India’s mines ministry was considering an MIP and will take about a week to send its recommendation. Domestic producers would benefit from an MIP if it makes imports more expensive.
India’s aluminium companies don’t want aluminium imports as their expanded capacity is sufficient to meet demand. In fiscal year 2016, India produced 2.79 million tonnes (mt) of aluminium, a 2.5 times increase over a decade ago, according to an ICICI Securities Ltd (I-Sec) research report. Consumption of aluminium, however, rose by a relatively lower 2.3 times to 2.3 mt in this period. If this was not enough, imports of aluminium add up to under 1 mt. That leaves domestic producers with no choice but to export.
The ongoing capacity addition programme will worsen the situation. In FY17, aluminium production is estimated to increase by 18.3% and increase further in the next few years (see chart), says the I-Sec report. While Hindalco Industries Ltd’s capacity addition is nearly done, Vedanta Ltd’s capacity expansion is ongoing. This could see total aluminium capacity increase to 4 mt by FY20.
As things stand, domestic consumption is not enough to absorb this incremental capacity. An MIP can help to some extent, if it makes imports uncompetitive. But the industry’s dependence on exports will increase and this will see a sizeable part of the output going to the overseas market. I-Sec estimates Indian exports could be as much as 40% of what China exports at present, assuming imports remain constant at current levels, fuelling protectionist calls against Indian aluminium.
A surplus metal position can also mean pressure on domestic prices, which may erode the premium being earned by domestic producers. These are the risks facing the aluminium industry. There could be mitigating factors as well. Better-than-expected consumption growth in India is one. Also, while capacity may increase, producers can limit their output to keep the market balanced. If that helps support aluminium prices, earnings can benefit. At present, spot aluminium prices are up by 7.8% over their early-October levels. Realizations also depend on the premium over this price that producers can charge.
What appears certain is that India’s aluminium producers will export more aluminium by FY20, making them more exposed to global factors than a few years ago.