August 27, 2010

Aluminium Industry

Overview

Aluminium Industry in India is a highly concentrated industry with the top 5

companies constituting the majority of the country's production. With the growing
demand of aluminium in India, the Indian aluminium industry is also growing at an
enviable pace. In fact, the production of aluminium in India is currently outpacing the
demand.

Though India's per capita consumption of aluminium stands too low (under 1 kg)
comparing to in-microseccap1
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04:32:16 US & Europe (range
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from 25 to 30 kgs), Japan (15 kgs), Taiwan (10 kgs) and China (3 kgs), the demand is
growing gradually.

The most commercially mined aluminium ore is bauxite, as it has the highest content
of the base metal. The primary aluminium production process consists of three stages.
First is mining of bauxite, followed by refining of bauxite to alumina and finally
smelting of alumina to aluminium. Production of 1 tonne of aluminium requires 2
tonnes of alumina while production of 1 tonne of alumina requires 2 to 3 tonnes of
bauxite.

The aluminium production process can be categorized into upstream and downstream
activities. The upstream process involves mining and refining while the downstream
process involves smelting and casting & fabricating. Downstream-fabricated products
consist of rods, sheets, extrusions and foils.

Indian manufacturers are the lowest cost producers of the base metal due to access to
captive power, cheap labour and proximity to abundant supply of raw material.
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 Among the different downstream activities, Aluminium Foil Packaging is among one of
the fastest growing sector. Demand for aluminium foil packaging sector is
characterized as a derived demand, which means the demand for this sector is derived
from the demand of other sector.

Most of the industries create wealth but the packing industry plays a unique role by
way of both creation of wealth through a wide range of manufacturing activities and
also by way of preserving wealth or value created. It serves the economy by helping
preservation of the quality and increasing the life of the products ranging from milk
and biscuits, to drugs and medicines, processed and semi-processed foods, fruits and
vegetables, edible oils, besides domestic appliances and industrial machinery and
other need.

Initially, Packaging was merely a medium to carry a product but discovery of

aluminium foil in the flexible form along with the properties like tasteless, odorless
and opaque has further differentiate it from other substitute as a potential packaging
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material. The aluminium foil packaging industry has registered a robust growth rate
over the past years and is expected to increase at a higher rate.

The Indian aluminium industry registered a growth of around 9% in FY09. Strong

growth in industrial, infrastructure, automobile, transportation and power sectors
during the first half of the fiscal were the key drivers for the demand. However,
realizations for the fiscal fell significantly on account of fall in LME prices due to the
global credit crisis, thus causing a dent in margins. On the other hand, the steep
depreciation of Indian rupee against the US dollar impacted the industry positively.
The total aluminium production in the country stood at around 1.35 m tonnes in
FY09.

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 Aluminium Production

India is world's fifth largest aluminium producer with an aluminium production

competence of around 2.7 million tones, accounting almost 5% of the total aluminium
production in the world. India is also a huge reservoir of Bauxite with a Bauxite
reserve of 3 billion tones.

The Production

India lies at the eighth position in the list of leading primary aluminium producers in
the world. India saw a significant growth in aluminium production in the past five
years. In 2006-07, the production target of aluminium in India laid by the Ministry of
Mines, Government of India was 1,153 KT, which was augmented to 1,237 KT in the
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next year (2007-08). Due to the growing demand from the construction, electrical,
automobiles and packaging industry, the production of aluminium also hiked up. In
FY 09, the total aluminium production in India was around 1.35 tonnes.

The Consumption

After a stagnant consumption of primary aluminium in India from the end of 1990s to
2002 (when the consumptions were between 500 – 600 KT), it started rising sharply
since 2002. The consumption reached at 1,080 KT in 2006. The consumption of
aluminium in India is dominated by the industries like power, infrastructure, and
transportation etc.

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 The Major Players

The Indian aluminium industry is dominated by four or five companies that constitute
the majority of India's aluminium production. Following are the major players in the
Indian aluminium industry:

• Hindustan Aluminium Company (HINDALCO)

• National Aluminium Company (NALCO)
• Bharat Aluminium Company (BALCO)
• MALCO
• INDAL

1. HINDALCO: Hindalco is the biggest player in the aluminium industry in India

with around 39% of market share. An Aditya Birla Group flagship company,
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Hindalco has its aluminium plant at Renukoot in Uttar Pradesh. It has various
aluminium products with a market share of 42% in primary aluminium, 20% in
extrusions 63% in rolled products, 31% in wheels and 44% in foils.

2. Sterlite Industries: The aluminium business of Sterlite Industries Limited

comprises of two Indian aluminium giants – BALCO and MALCO. While BALCO is
a partially integrated, MALCO is a fully integrated producer of aluminium.
Sterlite has got a market share of around 32%.

3. NALCO: It is also one of the leading aluminium producers in India. Government

of India has a stake of 87.15% in this company. Its aluminium refinery is located
at Damanjodi. It also has a smelter located at Angul, Orissa. Currently, NALCO is
concentrating on a capex programme to increase its production from 345,000
tonnes to 460,000 tonnes.

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 Industries served

In India, the industries that require aluminium most include power (44%), consumer
durables, transportation (10-12%), construction (17%) and packaging & other etc.

Highlights of Industry

• The aluminium production process can be categorised into upstream and

downstream activities. The upstream process involves mining and refining while
the downstream process involves smelting and casting & fabricating.
Downstream-fabricated products consist of rods, sheets, extrusions and foils.
• The Indian aluminium sector is characterized by large integrated players like
Hindalco and National Aluminium Company (Nalco). The other producers of
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primary aluminium 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.

• The per capita consumption of aluminium in India continues to remain very

badly 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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 Global Aluminium Industry

The global aluminium industry hit a rough patch, with the global financial crisis,
which began in the last quarter of 2008, severely impacting the demand for the
industry. The growth in industrial production of most of the major economies, slipped
into the negative territory after several years of strong positive growth. The slowing
economy severely affected the demand in the markets. The earlier years of strong
growth inspired many manufacturers to increase their capacities, thus affecting the
supply end as well. The double impact of a slowdown in demand and the expansion of
capacities caused an unprecedented increase in inventory levels across the industry.
This rise in the inventory levels induced the prices to tumble.

Conclusion
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The aluminium sector looks attractive due to expected rise in prices on account of
increasing demand from China and some other European countries .The domestic
market would also see increase in demand due to boom in power sector and
automotive sector which would translate the future of aluminium sector to bullish
phase. Thus, the aluminium sector has become a hot pot owing to the movement in
prices triggered by the healthy growth in the global production; favourable movements
in the auto, construction, power, and packaging sectors have triggered the growth of
the aluminium sector. Therefore, we are BULLISH on the sector; as the sector offers
extreme upside potential in the near future.

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_________________________________________________________________
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information contained herein is from publicly available data or other sources believed to be reliable but
we do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India
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that may arise to any person from any inadvertent error in the information contained in this report. This
document is provided for assistance only and is not intended to be and must not alone be taken as the
basis for an investment decision.

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