5% safeguard duty on aluminum to have limited upside: Report

Move to impose 5 per cent safeguard duty on aluminum imports is likely to provide only modest protection to domestic companies from cheap imports as it is unlikely to push margins significantly, says a report.
Aluminum producers are unlikely to realise price increases equivalent to the provisional 5% safeguard duty as proposed by the Director General of Safeguards, given the structural issues including over-capacity, import pressure and weak demand. Moreover, the industry has a high proportion of export which will not benefit from the imposition of safeguard duty, India Ratings said in a note today.
Recently, the Directorate General of Safeguards Customs and Central Excise has recommended a provisional safeguard duty of 5 per cent ad-valorem for 200 days.

This move came in after incessant increase in imports in the past 12 months. Import of primary aluminum and aluminum alloys has jumped 13 per cent y-o-y to 0.4 million tonnes as of December 2015.
The country imports aluminum mainly from China and West Asia. Slowing economic growth in China (from 6.8 per cent in 2015 to 6.3 per cent in 2016) means a surplus in the international market and therefore a delay in price recovery.
For domestic players, it implies higher competition from low-cost imports as well as competition in export markets. Aluminum and aluminum alloys imports by China declined by 25 per cent y-o-y last year.

The agency believes weak domestic demand growth and surplus capacity could lead to low capacity utilisation in FY17. This is despite expectation of a moderate pick-up in consumption in H2 of FY17. Indian imports are likely to remain elevated, with excess capacity in China, even though the Middle Kingdom is likely to add 3.5-4 mt fresh capacity and shut 2.5 mt in 2016.

Back to India, the near-term new capacity, along with unutilised available capacity, is over 120 per cent of the 2015 output. Vedanta has started production from new capacities Balco-II and Jharsuguda-II smelters which may double its production in FY17 from FY16 levels.

Aluminum prices have fallen by around 15 per cent in the past 12 months to USD 1,520 a tonne as of March which is much better the November 2015 lows of USD 1,450. Accordingly Indian average realisations are estimated to have declined by 20-30 per cent in FY16.
The agency expects the FY17 profitability to continue to remain fragile compared to FY15, but is likely to improve from FY16 levels. Lower cost of inputs, cost control and higher percentage of value added products are likely to improve margins in FY17.