That in the final quarter of 2008-09 National Aluminium Company (Nalco), the country’s largest integrated white metal producer, would suffer a major setback in profit was a foregone conclusion. Like its peers across the globe, it had to contend with such uneconomic prices of both the intermediate material alumina and aluminium, that keeping one’s head above water became a major challenge.
The quarter which saw Nalco net profit fall to Rs 83 crore from Rs 416 crore in the corresponding quarter of 2007-08 experienced the three-month London Metal Exchange delivery price sinking to six-year low of $1,279 a tonne in February. At that kind of price, not much of the world aluminium smelting capacity could break even. The advantage for Nalco is that it finds a place in the most cost-effective global quartile of alumina and aluminium producers. Nalco’s cost effectiveness is underpinned by its ownership of bauxite deposits of high quality close to its 2.1 million tonnes refinery, a 460,000 tonnes smelter backed by a 1,200 Mw power complex virtually on a coal pithead and a highly cost-effective Pechiney technology.
Nalco chairman CR Pradhan says the current quarter to end in June will see the company reporting an all round improvement in working. No doubt about that. LME aluminium cash price is about $1,600 a tonne while the price for three-month delivery is $1,630 a tonne. Pradhan expects aluminium prices to remain bound between $1,500 and $1,800 a tonne in the coming months.
Nalco would sell a major part of its production of ingots, wire rods and billets to the local rerollers and fabricators. Normally, the company will have around 100,000 tonnes of aluminium available for exports. What has come as music in a long time to finance director BL Bagra’s ears is the premium the metal is commanding on LME cash prices in the principal Asian markets of Japan, South Korea and China.
Import duty being only 5 per cent, Indian aluminium prices cannot but follow the LME rates (add freight and handling costs to that) at any point. Even then, claims Pradhan, Nalco is the price setter here and the other producers would follow its lead.
It is not only the dearer aluminium that will improve the top and bottom line of Nalco in the current quarter, but also the better prices that it has started fetching from export sales of alumina. Pradhan and Bagra find support for their near-term optimistic outlook in no less a corporate than United Company Rusal, the world’s largest producer of aluminium.
Rusal by now has taken 500,000 tonnes of aluminium capacity or 11 per cent of its total offline as part of the world industry’s collective drive to bring supply in line with demand. Based on the assumption that the world has seen the worst of the current economic crisis, Rusal is hoping for “a significant improvement” in prices in the quarter beginning July. Rusal director Arten Volynets says “Aluminium prices are still at the bottom. But if you look into the third quarter, you will see a significant improvement, maybe earlier.” This is exactly what is happening with actual users and traders now engaged in rebuilding stocks after largely using up inventories.
If we have seen the bottom in aluminium prices and metal demand has started recovering, albeit in a market specific way, that is Asia, it has to be because of regeneration of invoices from the transport and construction sectors. During the downturn since July-end, it is only the packaging sector where aluminium demand stayed more or less steady. Good sales of beverages and packaged food would confirm that. But whatever be the performance of the packaging sector, it cannot compensate for the demand contraction in transport and construction space accounting for nearly half of the global semis demand. If buyers from Japan, South Korea and China are keen to secure supplies of aluminium for delivery in the next three months and ready to pay a premium on LME prices, then perhaps finally some signs of revival in the automobile and construction sectors are visible.
No doubt, the nearly 6 million tonnes cutback in production in which China’s share is as much as 3.5 million tonnes was a good effort to bring supply in line with demand. But the industry still has to contend with over capacity of around 1.5 million tonnes. This will not do any good to aluminium prices. In the circumstances a point of concern for Bagra is China restarting about 1 million tonnes of capacity idled earlier. As with other metals, it is difficult to decipher the rationale of China’s moves in aluminium. The country has quite substantially stepped up primary metal imports as it raises domestic production.
