Directorate General of Safeguards Customs and Central excise has recommended a provisional safeguard duty of 5% ad-valorem for a period of 200 days. This is following the incessant increase in the imports into the country in the last twelve months. Import of primary aluminum and aluminum alloys has increased by 13% yoy to 0.4mt as of December 2015.
India imports aluminum metal mainly from China and Middle-East. Fitch expects China's GDP growth rate to slow down to 6.3% in 2016, compared with 6.8% in 2015. Slowing economic growth in China means a surplus in the international market and therefore a delay in price recovery. For domestic players it implies increased competition from low-cost imports into India as well as competition in the export markets. China's import of aluminum and aluminum alloys has declined by an estimated 25% yoy for trailing twelve months ending January 2016.
Ind-Ra believes weak domestic demand growth and surplus capacity could lead to low capacity utilisation in FY17. This is despite the agency's expectation of a moderate pick-up in consumption growth during 2HFY17. Imports into India are likely to remain elevated, with excess capacity in China. The agency expects China to add 3.5-4.0mtpa efficient capacity and shut 2.5mtpa in 2016. Efficient new capacities in China and Middle East will underpin sustained import pressure.
In India, the near-term new capacity, along with unutilised available capacity, is over 120% of the 2015 output. Vedanta Limited ('IND AA'/Negative) has started production from new capacities BALCO-II and Jharsuguda-II smelters which may double its production in FY17 compared to FY16.
LME Aluminum prices have fallen by around 15% in the last 12 months to USD1520/ton as of end-March 2016. However the prices have recovered from the lows of USD1450/ton observed in November 2015. Indian average realisations are estimated to have declined by 20%-30% yoy in FY16, with a decline in LME and local premiums. The weak rupee has moderately off-set some of the decline. Physical premiums in India nearly halved in 2015 compared to 2014. Aluminium divisions at Hindalco Industries Ltd and Vedanta (Vedanta Aluminium) have reported a substantial decline in their absolute margins by 70% in 9MFY16.
Ind-Ra expects the FY17 profitability of the producers to continue to remain fragile compared to FY15, however is likely to be improve from FY16 levels. Lower cost of inputs, cost control and higher percentage of value added products in the sales mix are likely to improve margins in FY17. Vedanta's FY16 blended cost of production declined by 10% yoy to USD1,570/mt and is likely to decline further to USD1,400-1,450/ton in FY17, due to softer input prices and energy costs.
Ind-Ra believes the increase in the capacity utilisation and local premiums will depend on the strong revival in domestic demand. The increase in government spending on infrastructure will be the key catalyst for acceleration in consumption in the key end-user industries, namely Construction, Auto and Power.
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