India’s aluminum producers are struggling, in spite of being credited with some very competitively priced smelter capacity and having recently invested in new technology.
Indian aluminum mills, unlike the steel industry that is sheltered behind import tariffs and a dominance of domestic producers, the aluminum industry is not so protected, leaving the producers with little pricing power in the face of intense competition from China and West Asian semi-finished product producers. Steel imports account for only 12% of the domestic market, yet for aluminum a massive 56% is met by imports as they surged from the 40% level just a few years ago.
Aluminum Producers Facing Losses
After investing $20 billion in new capacity, Bharat Aluminium Company (Balco), NALCO, Vedanta and Hindalco have a combined installed capacity of 4.21 million metric tons. But actual production last year was just 2.26 mmt, meaning a capacity utilization of only 49%. Where China has moved down the cost curve by utilizing low-priced coal deposits and economies of scale with massive plants adopting the very latest technology, Indian producers have been hampered by higher coal costs following a reorganization of the domestic coal market and rising logistics costs.
According to the Indian Business Standard, last month Balco, a part of Vedanta Ltd., said that it has shut down its aluminum rolling business due to steep price falls due to dumping from China. During the same month, Vedanta Aluminium said it had started the closure process of one of its production lines at it’s Lanjigarh facility cutting output by half.
Indian extrusion mills are on delivery lead-times measured in days rather than weeks or months, although these have improved from 4-6 weeks ago when they were literally 2 days from date of order for some products.
To Tariff or Not To Tariff?
India’s Mines Secretary, Balwinder Kumar, is of two minds about whether to grant aluminum producers protection in the form of import tariffs. He’s worried that consumers will be hurt by higher costs as a result, so the imposition of a tariff is by no means a foregone conclusion, but our expectation is the producers will be successful.
They have huge political clout and politicians may be persuaded they do not want their shining jewels turned into non-performing assets unable to service debts or to see debt defaults on the massive loans metals producers have taken out to fund the investments.
Fortunately, the likes of Hindalco Industries (NSE:HALC) are more diversified businesses for whom overseas operations like Novellis are doing better and the copper division is making good returns from refining charges. Nevertheless, with China almost on the doorstep they will struggle with aluminum.
China possesses more than 50% of the world’s aluminum production and, according to another source, is now exporting over 20% of its products. China’s exports to India have surged by 200% in 2014-15 compared to 2010-11 and India’s previously well-padded home market is being decimated, a situation that isn’t likely to change anytime soon.
by Stuart Burns