The Indian aluminium sector is characterised by large integrated players like Hindalco and National Aluminium Company (Nalco). India has the fifth largest bauxite reserves with deposits of about 3 bn tonnes or 5% of world deposits. India's share in world aluminium capacity rests at about 3%.
The per capita consumption of aluminium in India continues to remain abysmally low at under 1 kg as against nearly 25-30 kgs in the US and Europe, 15 kgs in Japan, 10 kgs in Taiwan and 3 kgs in China, which implies significant potential for the sector. The key consumer industries for aluminium 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%-12%).
|
|
Customs duty on primary and secondary forms of aluminium have been reduced to 5% from the earlier 7.5%. |
|
|
Dividend distribution tax to be hiked from 12.5% to 15%. |
|
|
The reduction in customs duty on aluminium would keep a check on a rise in prices, as landed cost of these would effectively reduce, thus reducing the net difference between landed and domestic costs. |
|
|
Asia will continue to be the high consumption growth area led by China, which has been and is expected to continue to register double-digit growth rates in aluminium consumption in the near to medium-term. On the domestic front, the aluminium sector will continue to benefit on account of buoyancy in construction, transportation and packaging sectors.
The budget proposals with respect to power sector are also a big positive (44% of total domestic aluminium is consumed by power), but concerns remain with respect to timely implementation.
On the realisations front, with reduction in import duties, domestic realisations of aluminium majors, namely Hindalco and Nalco, are likely to be under pressure, as the buffer on international prices is reduced. Besides, with greater linkage to international prices, volatility in financials could increase. However, producers are moving downstream to negate the higher volatility. |
|
|
This move is likely to negatively impact Indian players like Hindalco and Nalco as it gives them limited headroom to increase prices. |
|
|
Lower excise duty to perk up domestic demand. |
| Budget 2004-05 |
|
Budget 2005-06 |
|
Budget 2006-07 |
|
|
|
|
|
|
Customs duty reduced from 20% to 15% on copper.
A surcharge of 2% on account of education cess will be imposed on corporate tax. |
|
The budget announcement is a negative for copper converters. It must be noted that the customs duty on copper concentrates has been maintained at 5% while that of copper has been reduced from 15% to 10% thus reducing the net effective buffer available to copper converters from 10% to 5%.
Also, the reduction in customs duties on non-ferrous metals is likely to keep a check on a rise in prices as landed cost of these would effectively reduce, thus reducing the net difference between landed and domestic costs. |
|
Customs duty on primary and secondary forms of non-ferrous metals namely aluminium, copper, zinc and tin and other base metals, has been reduced to 7.5% from the earlier 10%. |
|
|
|
|
|
|
| Key Positives |
|
|
|
Growth potential: The per capita aluminium consumption in India is less than 1 kg compared to about 3 kgs in China and 30 kgs in the US. The fact that almost 44% of the domestic aluminium is consumed by the electrical sector and there are only about 300 applications for the metal in India 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 3,000 applications for the metal. |
|
|
The India advantage: Indian aluminium companies are amongst the lowest cost producers of the metal 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 an edge over their international peers. | |
|
| Key Negatives |
|
|
|
High dependence on power sector: The electrical sector consumes a major chunk of the total cost of 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, the growth in the power sector is likely to be slow. |
|
|
Waning tariff protection: The consistent decline in import duties reduces the net tariff protection for aluminum producers making them vulnerable to cheap imports, which could be detrimental to their financial health, especially during times of cyclical downturns |
|
|
The China factor: Strong demand for the metal from China and simultaneous improvement in economies like the US and other Asian economies led to the strength in global aluminium prices. However, the all time high aluminium prices have started witnessing pressure as the industry is expected to witness excess supply of 0.562 MT in 2007 as compared to 0.287 MT supply shortage in 2006. Chinese aluminium supply is exceeding demand growth. Surplus is being exported in the form of semis leading to surplus situation in the global aluminium markets, which will ultimately lead to softening of prices.
| |
Equitymaster.com is one of India's premier finance portals. The web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.
