Aluminium prospects seem promising

The budget announcement is a negative for copper converters such as Hindalco. It must be noted that the customs duty on copper concentrates has been maintained at 5% while that of copper has been reduced from 20% to 15% thus reducing the net effective buffer available to copper converters from 15% to 10%.

We continue to maintain our positive stance towards the aluminium and copper sector post the Budget. While we admit that the reduction in customs duty would put pressure on copper players margins, over the medium-term, the prospects for both copper and aluminium seem promising. This is on the back of a global economic recovery and a stronger domestic economic growth. Further, the aluminium sector will benefit from impressive growth potential of transport, construction and packaging sector. The budget proposals favoring the power sector are also a big positive (1/3rd of total domestic aluminium is consumed by power). The global recovery in aluminium demand, led by major economies like the US, Europe, Japan and China, is intact. The prices of the metals therefore, are unlikely to weaken much in the medium-term.

Restoration of export incentives like that of duty entitle pass book (DEPB) schemes, which currently offer DEPB of a mere 7% (down from 11% last year) in order to facilitate exports.

Restoration of section 80HSC of the Income-Tax Act (export income non-taxable), which was discontinued from April 2004.

Reduction in excise duties from the current 16% to 8%, but maintain the customs duty of 15%.

Peak customs duty reduced from 30% to 25%.

Decrease in freight rate by 5.3%. Confessional freight for short distance transportation.

Surcharge on corporate tax halved from the current 5% to 2.5%.

The per capita aluminium consumption in India is just about 0.5 kg compared to about 3 kgs in China and 30 kgs in the U.S. The fact that almost 1/3rd of the domestic aluminium is consumed by the electrical sector and there are only about 300 applications for the metal in India, this leaves a lot of room for the domestic sector to grow. Just to put things in perspective, aluminium usage on the global front is tilted towards transportation and packaging sectors and there are an estimated nearly 3,000 applications for the metal.

Led by massive Chinese consumption, aluminium prices witnessed considerable strength over the last one-year. Further, with signs of the US and European economies showing relative strength as compared to last year, the demand for the metal and hence its prices are likely to remain firm in the medium term.

Indian aluminium producers are one of the lowest cost producers in the world, which is a significant advantage, especially during times of cyclical downturns. Abundant bauxite reserves and access to cheap labour have given the domestic aluminium manufacturers this edge over their international peers.

The electrical sector consumes over 1/3rd of the domestic aluminium production. But considering the sticky positions of the State Electricity Boards (SEBs) and uncertainties raised with respect to the smooth implementation of the Electricity Act 2003 tends to keep in question the growth in the power sector.

The approach adopted by the incumbent government towards privatisation, which has put on the back burner the divestment of state-owned Nalco, has provided a sort of a setback to the consolidation in the sector. Consolidation in any industry not only helps it to compete better but also improve overall efficiencies.

The consistent reduction in import duties reduces the net tariff protection for the aluminum producers