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India and Alumina
India and Alumina
India and Alumina
On
Indian Primary Aluminium Market
Table of content
1. Introduction on Aluminium
2. Research Overview
3. Global Aluminium Industry
1. Global Production
2. Global Consumption
3. Top Global Companies in Primary Aluminium
4. Indian Aluminium Industry
1. History
2. Features of Indian Aluminium Industry
3. Primary Aluminium Production
4. Consumption
5. Analysis of Indian Primary Aluminium Market
1. Type of Market
2. Profile of Key Players
3. Reasons of Indian Aluminium Industry being an Oligopoly
4. Porters Competitive Framework
6. Pricing of Primary Aluminium
7. Conclusion
1. Challenges Ahead
2. Outlook
8. References
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 climate change.
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.
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.
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.
Research Overview
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
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.
Russia
Canada
European Union
China
Australia
Brazil
Norway
South Africa
Venezuela
Bahrain
India
New Zealand
The global production of aluminium figures around 38 million tons and the above-mentioned
countries share more than 90% of the aluminium production. China and India reported the
greatest increases in aluminium output, at 12 percent and 11 percent respectively.
(The above chart shows the Global Aluminium Production from 1997-2007)
Country
2001
2002
2003
2004
2005
2006
China
Russia
Canada
USA
Australia
Brazil
3371
3302
2583
2637
1797
1132
4321
3348
2709
2705
1836
1318
5547
3478
2792
2705
1857
1381
6689
3594
2592
2517
1895
1457
7806
3647
2894
2480
1903
1498
9349
3718
3051
2281
1932
1604
Norway
1068
India
624
S. Africa
654
Bahrain
522
Source: ABARE
1096
671
704
517
1192
799
733
526
1322
861
864
524
1377
942
851
708
1427
1105
887
844
(The above chart shows the country wise data of Aluminium Production)
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.
2.
3.
4.
5.
6.
Transportation
Construction
Packaging
Electrical
Engineering
Consumer Durables
%age of comsumption
Transportation
9%
Construction
4%
29%
9%
Packaging
Electrical
Engineering
12%
Consumer Durables
Others
15%
22%
1.
2.
3.
4.
5.
6.
7.
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.
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
Highly concentrated industry with only five primary plants in the country.
Controlled by two private groups and one public sector unit.
Bayer-Hall-Heroult technology used by all producers.
Electricity, coal and furnace oil are primary energy inputs.
All plants have their own captive power units for cheaper and un-interrupted power
supply.
Energy cost is 40% of manufacturing cost for metal and 30% for rolled products.
Plants have set internal target of 1 2% reduction in specific energy consumption in
the next 5 8 years.
Energy management is a critical focus in all the plants.
Two plants have declared formal energy policy.
Each plant has an Energy Management Cell.
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.
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.
%age of comsumption
Transportation
Construction
8% 4%
6%
22%
13%
36%
11%
Packaging
Electrical
Engineering
Consumer Durables
Others
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
HINDALCO
Sterlite
Industries
NALCO
Capacity
(Ktpa)
471
Market
Share
39%
385
32%
345
29%
Market Share
NALCO; 29%
HINDALCO; 39%
(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)
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.
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.
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.
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.
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.
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.
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%. As a result of these macro economic factors, average aluminium
realisations for FY08 declined sharply by11% as compared with FY07 realisations.
Conclusion
Challenges Ahead
1. A long-term decline in the real price of Aluminium will erode margins of the firms
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 no alternate
method developed to extract metal from the ore.
5. Intense competition from other materials such as steel and plastics which are the
substitutes to aluminium.
6. Need to respond to the changing demands of global customers, such as automakers 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.
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.
References
1. www.commoditywatch.com
2. www.metalworld.co.in
3. www.equitymaster.com
4. www.crnindia.com
5. www.nalco.com
6. www.hindalco.com
7. www.vedantaresources.com
8. www.indiainfoline.com
9. London Metal Exchange Website
10. International aluminium Institute website.
11. Annual Reports of HINDALCO, NALCO and Vedanta (Sterlite Industries).