Banking on sustained growth

IN FOCUS/ ALUMINIUM

With fiscal 2005 expected to report 6.5-7 per cent growth in GDP, domestic demand for aluminium would increase, according to a research report by ICRA. Thus, the outlook for aluminium was positive for the near future.

Demand drivers would include construction, automotives and consumer durables.

The enactment of the Electricity Act, 2003, was expected to provide a boost to aluminium demand emanating from the domestic power sector, the report added.

ICRA felt India had large untapped demand potential for aluminium, as evident from the country's low per capita consumption of the metal.

Other types of demand were likely to emerge, with the uses of aluminium increasing. Given its versatility, the demand potential is likely to increase further, said ICRA.

Indian producers could hope to gain from the likely rise in international demand for aluminium as well. Growth in global demand outpaced increase in aluminium supplies even as fresh requirements, especially from the American and Chinese economies, looked set to push up demand further, the report said.

On the supply side, the main constraint was limited global capacity for alumina. Adding to the shortage was the recent Chinese move to ban fresh investment in aluminium projects.

The demand-supply scenario emerging presents good prospects for domestic producers of aluminium, said the report.

In response, domestic players have already drawn up major expansion plans. Sope for stepping up aluminium supplies in the Indian aluminium industry was sigificant as opposed to the situation globally, said the report.

Bauxite reserves in the country far exceeded production capacities and could sustain much higher production.

Indian manufacturers were among the lowest cost producers of aluminium in the world. Companies were thus placed favourably both in the alumina and aluminium export markets.

Bauxite mining costs were lower in the country by global comparison because of the abundance of bauxite reserves and the favourable location of such reserves, while the availability of cheap labour aided extraction, the report pointed out.

On the other hand, producers had to bear higher electricity costs as compared with their global counterparts. But lower cost of ore more than compensated for higher power cost, said ICRA.

To lower power costs, domestic producers have developed captive power capacities. Nalco was the most efficient aluminium smelter among domestic producers with the highest operating margins in the industry thanks to this adavatage, the report said.

Nalco's mines have richer bauxite reserves as compared with those of its counterparts, ICRA pointed out. Its smelters consumed least power per unit of aluminium production in the domestic industry.

Nalco was also selling over half its alumina production at higher margins as compared with primary aluminium.

Indal before its meger had to buy over half of its power requirements from external producers as well as 20-30 per cent of its primary aluminium requirements for downstream products. The other producers met around 90 per cent of their power requirements from captive plants.

Balco had the lowest margins among domestic producers because it consumed the highest power per unit of aluminium production.

Till fiscal 2003, its employee costs were higher than the industry average, ICRA stated. Balco's voluntary retirement schemes would lower employee costs in fiscal 2004. Balco has planned expansion as well.