Indian Aluminium Industry

Research Paper 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 world’s 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.

Global Aluminium Industry Global Production Global production of primary aluminium rose from 32 million tons (MT) in 2005 to 34 MT in 2006, a jump of 6%. In 2007, it further increased to 38 MT, an increase of 12% YoY. China alone accounted for 29% of global primary aluminium production. Primary aluminium production is concentrated in relatively few countries. China alone produced 26 percent of the world total in 2006.The top five producers—China, Russia, Canada, the United States, and Australia—accounted for 59 percent of world output that year. Production is found where energy is cheap because making aluminium uses large quantities of electricity. The world’s largest aluminium smelter, now being planned for construction in Dubai, will have its own 2,600-megawatt power plant. Aluminium Producing Countries The ore of the metal i.e. bauxite generally occurs in the tropical and sub tropical areas of earth and is present in almost all continents except Antarctica with the estimated deposits of 65 billion tons. The major producers of primary aluminium in the world are •

United States of America

•

Russia

•

Canada

•

European Union

•

China

•

Australia

•

Brazil

•

Norway

•

South Africa

•

Venezuela

•

Bahrain

•

United Arab Emirates

•

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 3371 Russia 3302 Canada 2583 USA 2637 Australia 1797 Brazil 1132 Norway 1068 India 624 S. Africa 654 Bahrain 522 Source: ABARE

4321 3348 2709 2705 1836 1318 1096 671 704 517

5547 3478 2792 2705 1857 1381 1192 799 733 526

6689 3594 2592 2517 1895 1457 1322 861 864 524

7806 3647 2894 2480 1903 1498 1377 942 851 708

9349 3718 3051 2281 1932 1604 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

(The sector wise global consumption pattern of Aluminium) We observe from the above graph that 29% of all Aluminium is consumed by the transportation sector. This is because of the boom in the aviation and automobile industry. As Aluminium is a complementary to steel, the consumption for aluminium has substantially increased. Aluminium is the second most consumed metal on the earth, and is consumed and produced more than all non-ferrous metals combined together. By 2030, it is expected that primary aluminium consumption will cross more than 70,000 kilo tonnes (KT). At the beginning of this century, consumption was at 25,059 KT and since then it has grown steadily mainly on demand from Asia and in particular China. The total global consumption of aluminium stood at 33,970 KT in 2006 and has reached 37,800 KT in 2008. The overall demand saw a drop only in the 2001 when consumption was at 23,722 KT.

World's Top Ten Primary Aluminium Consuming Countries (in KT), 2001-06 Country 2001 2002 2003 2004 2005 2006

China USA Japan Germany S. Korea India Russia Italy Canada Brazil Source: ABARE

3492 5230 2014 1580 850 589 786 756 743 553

4115 5509 2010 1690 921 604 990 851 747 578

5178 5667 2235 1916 982 798 803 956 736 589

6043 5800 2319 1795 1118 861 1020 987 755 651

7119 6114 2276 1759 1201 958 1020 977 801 759

8648 6150 2323 1823 1153 1080 1047 1021 846 773

The country-wise pattern of primary aluminium consumption shows China's position as pre-eminent consumer. China is followed by the US, Japan, Germany, South Korea, India, Russia and Italy. The presence of four Asian countries viz, China, Japan, South Korea and India, clearly explains why Asia leads in the global consumption of primary aluminium. All these four Asian giants have become hubs for the global automobile industry, which consumes a major portion of primary aluminium. Top Global Companies in Primary Aluminium The top global companies in Primary Aluminium are ALCOA RUSAL ALCAN HYDRO 5. BHP Billiton 6. CHALCO 7. DUBALCO 1. 2. 3. 4.

Indian Aluminium Industry The Indian aluminium sector is characterised by large integrated players like Hindalco and National Aluminium Company (Nalco). The other producers of 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 namely Balco (Vedanta), National Aluminium Company (Nalco) and Hindalco (Aditya Birla Group). History Aluminium production in India commenced in 1938 with the commissioning of Aluminium Corporation of India's (Indal) plant in technical and financial collaboration with Alcan, Canada having a capacity of 2,500 ton per annum. The plant started with sheet production using imported aluminium ingots.

In 1959, Hindustan Aluminium Corporation (Hindalco) was set up at Renukoot in UP with an initial capacity of 20,000 ton per annum. Malco, a public sector undertaking was commissioned in 1965 with a capacity of 10,000 ton per annum. This was followed in 1975 by Balco, a PSU with a similar capacity of 10,000 ton. Finally in 1987, National Aluminium Company (Nalco) with a capacity of 0.218mn ton was commissioned in technical collaboration with Pechinery of France. In the 1970s, the government regulated and controlled the aluminium industry through price distribution controls and barriers to entry. The 1970 Aluminium Control Order compelled the Indian companies to sell 50 % of the aluminium produced for electrical purposes. 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.

Primary Aluminium Production India is considered to be the fifth largest producer of Aluminium in the world. It accounts to around 5% of the total deposits and produces about 0.8 million tons of aluminium. It is estimated that if the country’s aluminium consumption rate maintains, it’d be having the reserves for over 350 years. India has confirmed 3 billion tonnes of Bauxite reserves out of the global reserve of 65 billion tonnes. The worldwide alumina production competence is around 58 million tonnes in which India has 2.7 million tonnes. Most of the bauxite mines lie in Bihar, Karnataka and Orissa. In India, the production of aluminium is highly concentrated and is in the hands of the following three companies

•

Bharat Aluminium Co. Ltd (BALCO)

•

National Aluminium Co. Ltd (NALCO)

•

Hindustan Aluminium Co. Ltd (HINDALCO)

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.

(The sector wise Indian consumption pattern of Aluminium)

(The above chart shows the consumption of Primary Aluminium in India)

Analysis of Indian Primary Aluminium Market Type of Market The primary Aluminium production market in India is an oligopolistic market. The primary aluminium is a homogenous product. As the product is homogenous we can term the market as Pure Oligopoly. Though there are some grades in aluminium based on aluminium concentration like EC (Electrical conductivity) Grade, etc but there are very less difference in the quality of the product. There is little or no gap between the demand and supply as the supply just matches the demand. Moreover there is a huge demand from countries like china hence there is not constraint on the number of consumers. There are only 3 players in the aluminium market in India with total production of 1250 KT in 2008. The entry into market is possible but not easy due to the heavy initial capital that is required to setup the plant. As aluminium is a homogenous product there is no 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%

(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) Hindalco Industries Limited, a flagship company of the Aditya Birla Group, is structured into two strategic businesses aluminium and copper with annual revenue of US $14 billion and a market capitalization in excess of US $ 23 billion. Established in 1958, Hindalco commissioned its aluminium facility at Renukoot in eastern U.P. in 1962 and has today grown to become the country's largest integrated aluminium producer and ranks among the top quartile of low cost producers in the world. The aluminium division's product range includes alumina chemicals, primary aluminium ingots, billets, wire rods, rolled products, extrusions, foils and alloy wheels. It enjoys a domestic market share of 42 per cent in primary aluminium, 63 per cent in rolled products, 20 per cent in extrusions, 44 per cent in foils and 31 per cent in wheels. Hindalco has launched several brands in recent years, namely Aura for alloy wheels, Freshwrapp for kitchen foil and ever last for roofing sheets. Hindalco Industries Ltd. has been able to grow revenues from 121.2B to 193.2B. Most impressively, the company has been able to reduce the percentage of sales devoted to selling, general and administrative costs from 4.15% to 2.96%. This was a driver that led to a bottom line growth from 15.8B to 26.9B. The company is also believed to be keen on kick-starting its green field Aditya Aluminium Project which envisages an alumina refinery and aluminium smelter at an estimated cost of $1.8bn. The project includes a 1m tonne alumina refinery, a 2.5 lakh tonne aluminium smelter and a 660 MW captive power plant. Sterlite Industries Ltd (Vedanta) Sterlite Industries’ Aluminium business comprises of two operating companies, BALCO and MALCO. BALCO is a partially integrated aluminium producer with two bauxite mines, one refinery, two smelters, a fabrication facility and two captive power plants at Korba in central India. MALCO is a fully integrated producer with two bauxite mines, a captive power plant and refining, smelting and fabrication facilities at Mettur in southern India. The primary products are aluminium ingots, rods and rolled products. The smelters at BALCO and MALCO produced 380,000 tonnes in FY 2007, marginally higher than the rated capacity. The parent company Vedanta is coming up with a 5 lakh ton smelter in Jharsuda, Orissa. The project is in advance state and is expected to be operational by the year 2009. Reasons for Indian Aluminium Industry being an Oligopoly (Barriers to Entry) The reasons for the aluminium industry to be an oligopoly is Economies of Scale. The major input in producing primary aluminium is alumina and power which constitute about70% of the cost in producing. Although the requirement of alumina does not •

vary much with the size of the plant but the consumption of power varies drastically. Hence with higher production capacity the cost of production goes down. For a new player producing aluminium and low cost will be very difficult. •

Huge capital investments. The capital required to setup an aluminium production plant is huge. E.g.: BALCO spent about $1 billion to set up a 2.45 lakh ton capacity with 540MW power plant. •

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. •

Control over the Bauxite mines. As the raw material for manufacturing aluminium is bauxite the existing players have control over the bauxite mines in India and it would be difficult for a new player to get new bauxite mines. •

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. Porter’s 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.

Pricing of Primary Aluminium The major trading centers of aluminium in the world are •

London Metal Exchange (LME)

•

Tokyo Commodity Exchange (TOCOM)

•

Shanghai Futures Exchange (SHFE)

•

New York Mercantile Exchange (NYMEX)

These above mentioned commodity exchanges provide direction to the world aluminium prices. In India, aluminium is also traded at various commodity exchanges namely Multi Commodity Exchange of India and National Multi Commodity Exchange of India. Aluminium traded at around US$2,000 per tonne in the beginning of 1980 and since then witnessed a declining trend till 1986. The price plummeted to as low of US$919 per tonne in June 1982. The prices hovered around US$1,200-1,400 per tonne between 1982 till the middle of 1987. The prices breached 2000 US$ per metric tonne barrier in January 1988 and in the month of June reached an all time record-high of US$3,578 per tonne mainly on account of supply constraints in the world market. The late 1980s and early 1990s again saw a slump in prices due to collapse of USSR and resulting flood of aluminium into the world markets by the CIS countries, followed by an upswing in prices mid-decade and a declining trend again at the end of the decade. Post 2000, prices have stayed at US$1,200-1,400 per tonne level. In the past three years, the prices have shown an uptrend and have traded above US$2,000 per tonne. The other factors for the variation in the price of aluminium in the past two years are price of crude oil which increased from $70 per barrel to over $100 a barrel and fluctuation of INR. The rising crude prices resulted in higher prices for its derivatives. The soaring crude

also had a cascading effect in terms of higher transportation costs and higher prices of alternate energy sources like coal. All these led to a significant cost push for the aluminium 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 2. 3. 4. 5.

manufacturing primary aluminium. Pressures to improve return on investment. 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. Technological changes — particularly on the upstream side. There has been no alternate method developed to extract metal from the ore. 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 www.commoditywatch.com www.metalworld.co.in www.equitymaster.com www.crnindia.com www.nalco.com www.hindalco.com www.vedantaresources.com www.indiainfoline.com 9. London Metal Exchange Website 10. International aluminium Institute website. 11. Annual Reports of HINDALCO, NALCO and Vedanta (Sterlite Industries). 1. 2. 3. 4. 5. 6. 7. 8.