In difficult times, it is quite common for the government to open its purse to build a buffer stock of sugar (as happened two seasons ago) or cotton or jute. This apart, government agencies will be involved in the procurement of farm commodities at minimum support prices.
But what is unthinkable is for any group to urge the government to create a reserve of either aluminium or steel so that it sails through the present unprecedented crisis of steep demand and price falls with least injuries. As opposed to what will not happen in a free economy, the State Reserve Bureau of China (SRBC) is spending $530 million to buy 290,000 tonnes of aluminium directly from local producers.
In order to give relief to the producers, SRBC is procuring aluminium at a premium of about $530 a tonne to the LME price. Industry officials believe that China is likely to go as far as building an aluminium stockpile of 1 million tonnes or more as better times are awaited.
But what China is doing for aluminium is part of its strategic move to bolster prices of many other commodities whose fortunes have taken a beating in the wake of price falls and exports declining the most in nearly 13 years in January. A portion of China’s economic revival budget of 4 trillion yuan ($585 billion) is being used to build stocks of badly hit commodities.
Obviously taking a cue from China, UC Rusal, the world’s largest aluminium producing company, has urged Moscow to create a reserve of the non-ferrous metal to arrest price decline and stock accretion at the producer’s end. Rusal has not suggested how big an aluminium stockpile the government should be owning. At the same time, it wants the government to hold on to the suggested inventory till the crisis blows over.
Here, aluminium stock with every producer is growing as their profits are thinning at an alarming rate. With LME prices being lower than the local prices, exports are no longer an attractive proposition. While self-imposed exports are adding to the inventory, there have been surges in imports of value-added aluminium products at indefensible rates.
The Indian industry is not to ask for the same kind of government support as its counterparts in China and Russia. But what gives our industry some comfort is the government being convinced that the growing arrivals of flat rolled products and foils from China at prices lower than what they cost to make calls for giving protection to local aluminium producers.
Commerce secretary G K Pillai has in an apt riposte to Chinese dumping, said, “You can’t export to an extent which will destroy my domestic industry.” New Delhi is right in thinking that China has targeted India for dumping as the former remains a non-market economy with an “elevated production capacity” in almost all sectors.
This perception finds confirmation in the fact that in the last five years China aggressively grew aluminium capacity resulting in a huge production of 13.44 million tonnes in 2008. This was about one-third of the world output of 39.83 million tonnes.
The obvious provocation for China to indulge in dumping of rolled items and foils is that the demand within the country has ceased to grow at the same rate as in the past. Has not the International Monetary Fund said that China will grow only 6.7 per cent this year, the least since 1990? Management of surplus ferrous and non-ferrous metals will, therefore, remain a major preoccupation of Chinese authorities for months to come such is the global bite of recession.
The National Aluminium Company has been so conceived as to remain a significant exporter of both alumina and aluminium. Today Nalco chairman C R Pradhan’s principal concern is that the global primary aluminium consumption in the final quarter of 2008 fell by a massive 12.7 per cent y-o-y.
The demand collapse is forcing producers everywhere to cut production in an attempt to match demand and supply. We learn from CRU, London based research house, that till January end 5.8 million tonnes of smelting capacity was rested of which the Chinese share was as much as 3.3 million tonnes. At the same time, aluminium stocks with producers, LME, Shanghai Futures, Nymex, Japanese ports and the rest rose to over 5 million tonnes.
No surprise, therefore, that the 3-month delivery LME price for aluminium is moving around $1,300 a tonne making majority of smelters in the world unviable. As for Nalco, its 460,000 tonne smelter at Angul in Orissa is among the world’s lowest cost ones. This apart, Nalco in its role as price setter is steadfastly charging a premium over the LME rates., admits Pradhan.
