Aluminium : All set to create history

Aluminium industry in India is growing and preparing itself to meet future demand. The poor men’s silver has been successful in replacing steel to certain extent and reaching the height of applications in a number of industries including railways and aviation. It is bound to keep its momentum going in the year 2005 as well basically on the back of past performance and prospective future uses.
The aluminium producers managed to perform better than expected in the last quarter ending December 2004 as rising price of the metal on the LME and thus, in the rest of the world, the metal surged all time high. Fundamentals still remain strong for further growth in future.

Price at 9-year high
The aluminium price started touching new highs in the new year which had already touched 9-year high towards the end of December at $1943. It was a surprising moment when aluminium price on the LME shot up at all time high surpassing all resistance level on a weaker dollar and a strong previous late kerb, while China’s export tax contributed to upside momentum. Aluminum rose by 1.2% when traders returned to their desks after the Christmas closure. The dollar weakened to fresh lows of $1.3648 against the euro during one of the few last closing sessions of the year 2004, which makes dollar-denominated base metals more attractive for buyers outside the dollar-zone.

Year 2004
The year 2004 ended with a lot of hype and hoopla – be it aluminium consumption and availability, prices and stocks either on the LME or on the domestic front. All aluminium producers around the world had a year for opportunities which brought enough profit for them. Companies like Nalco and Hindalco in India found their way to cash in on to the maximum extent by rinsing higher demand from consumers. Despite having no increase in cost of production aluminium producers did not hesitate revising prices upwards in tune with the fluctuations on the LME. Development in China also helped them export more to that country and earn in dollars. The new year also started with a bang of price hikes by Rs.2000 for all aluminium products with room for further growth. In 2004, the average total stock out was recorded at 752,500 tonnes from the starting average of 14,47,250 tonnes to close at 694,750 tonnes.
The first month of the year i.e. January 2004 saw the average spot aluminium price at $1606.83 with a signal of high volatility in place which turned to the higher level of $1633.5 and lower level of $1578.5, hinting traders to remain cautious as stocks at this level was marching ahead day by day. The higher the stocks the smarter the risk was the only mantra for traders. But, surprisingly at this higher level of stocks - at 14,47,250 tonnes – they were forced to book metals anticipating availability tightness in future. The production cuts by major steel producers two years ago started taking their shape in early 2004. Therefore, the stocks level started declining as no fresh arrivals was seen. Hence, stocks started declining since January 2004 despite having huge volatility in the prices.
The average spot price of this metal surged in February to $1685.98 in which the price mounted to the highest level of $1754 but despite having higher take off in metals the price remained volatile. The turbulent price was seen declining at $1636. The average stocks moved down compared to the previous month at 13,96,975 tonnes. The average price of aluminium shot up at $1730.15 in April after declining a little in March at $1656.37 when stocks was continuously dwindling unexpectedly around 11,52,325 tonnes.
Again, metal started picking up in September when traders from the Western World were enjoying slowdown in business activities due to winter season. This was the month which headed the way for the rest of the year and since then the metal never turned back. Towards the fag end of the year the average settlement price shot up to $1849.55 making further headway for the New Year.

Production up
The total production of aluminium metal in the country during April-December, 2004 remained at 6,52,906 tonnes as against 6,15,786 tonnes during the same period last year. Out of this, the public sector National Aluminium Company Limited produced 2,48,498 tonnes and Bharat Aluminium Company Limited with 49 per cent Central Government equity 73,548 tonnes. The private sector Hindalco produced 2,54,050 tonnes, Indal 49,516 tonnes and Madras Aluminium Company Limited at 27,294 tonnes. Total production of alumunium metal during December, 2004 was 79,057 tonnes against a target of 77,195 tonnes. Out of this, Nalco produced 31,183 tonnes, Balco 8,738 tonnes, Hindalco 30,589 tonnes, Indal 5,543 tonnes and Malco 3,004 tonnes. Nalco exported 90,313 tonnes of alumina and 14,667 tonnes of aluminium during the month.

China limits exports
China slapped a 5% tax on exports of aluminium effective Jan 1 to keep the energy-intensive metal at home, a close source to the development said. The current step of China will depress supply on global markets in 2005. An official from the tax bureau of the State Council — the country’s cabinet — said that Beijing would also impose a tax of 10% on exports of blister copper and scrap copper, while levying a 5% tax on refined copper exports. China abolished export tariffs on those metals in 2000 to spur exports — a pillar of the world’s seventh largest economy. But Beijing is now trying to rein in some of that growth, while simultaneously tackling power and transport bottlenecks. China’s economy grew 9.1% in the year through the third quarter of 2004. The export tax comes on top of the removal on Jan 1 of an 8% tax rebate now enjoyed by primary aluminium exporters.
Tax changes would spur the closure of smaller, inefficient aluminium smelters, which gobble up enormous amounts of power in an already energy-starved country. Many operate at a loss. The tax is likely to depress aluminium exports, said Liu Qiang, board secretary for Aluminum Corp of China Ltd, the country’s largest aluminium group. Chalco is expected to produce about 780,000 tonnes of aluminium this year. Over the past year, Beijing has imposed economic cooling measures, including credit curbs and higher power fees, to cut the capacity of China’s power-hungry aluminium sector. Its capacity rose 2.6 times between 2000 and 2003 to 8.34 million tonnes. China had been expected to export about a fifth of its aluminium output in 2004, and had been a major supplier of the metal in international markets this year.
In the first 11 months, exports of primary aluminium rose 41% to 1.2 million tonnes, encouraged by high global prices. Domestic aluminium exporters have been scrambling to ship cargoes before changes took effect. The 5% tax on exports of unwrought aluminium — used in the automobile, construction and packaging industries — was in line with smelters’ expectations. “China’s export reduction will support aluminium prices in the international market,” Yang Jun, Dalian, Northern Futures’s research manager, said. And domestic prices would come under heavy pressure because China has a surplus of the metal, he added. Three-month aluminium futures on the LME rose 6% in December, partly in anticipation of reduced supply from China.

Global supplies unaffected
China’s new tax regulation on aluminium exports will not have a major impact on global supplies of this metal as it will increase supply in the domestic market and hurt profitability of metal producers and exporters, but is unlikely to reduce supply in the global market. Given its status as the world’s largest aluminum producing country, China will continue to export its way out of slower demand growth at home while production continues to expand. It is assumed that China will continue to export large volumes of aluminum because domestic demand growth is slowing down, and that the new export tax will hurt producers’ profitability at most.
Currently, China’s aluminum exporters pay a 17% value added tax, of which eight percentage points are reimbursed by the government. But, since January 01, 2005 the government abolished such reimbursement system. Despite the planned imposition of a new export tax in 2005, China will continue as a net exporter of aluminum, with net exports likely to rise 13% on year to around 700,000 tonnes in 2005. Domestic demand growth of aluminum in China is forecast to slow to 11% in 2005, from an estimated growth of 20% in 2004. The global aluminum market is forecast to swing to a balance in 2005 from an expected deficit in 2004, with surplus likely to occur from July, with most of the new output coming from China, Bahrain and Canada. In 2003, China exported 1.25 million tonnes of aluminum and imported 880,000 tonnes.
The total Chinese consumption of aluminum is set to touch the six million tonnes mark in 2004, with exports forecast at 1.78 million tonnes and imports at 1.050 million tonnes. Export realizations will be negatively impacted by the tax as well as the elimination of the VAT rebate on exports. Domestic market prices may be driven down in the short run as material is diverted onto the domestic market from exports. However, that will be temporary. Lower domestic prices will then deter imports allowing domestic prices to recover to their previous relationship to the LME price. Analysts in China, on the other hand, expect the new regulation to reduce global supply of aluminum in the long term because the Chinese will lack an incentive to export aluminum. In the short term, there has been a rush to export aluminum (before the VAT rebate removal). In the four months (to November), monthly aluminum exports were above 200,000 tonnes and about 300,000 tonnes in December.
China’s strict measures to contain growth in its power-hungry aluminium industry are likely to turn the country into a net importer of the metal by ’08. Wang Feihong, an analyst with state-run Beijing Antaike Information said that China’s aluminium output would grow only 2% between ’07 and ’08, compared to an increase of 20% expected this year. Consumption would grow more than 10% annually over the next three years and by 9.4% between ’07 and ’08. China’s aluminium consumption has risen by an average of 14.5% in the past five years, he added. “Industrialisation, urbanisation and China’s role as a factory for the world will remain major factors for aluminium consumption,” Wang said in a paper prepared for the ’04 China Aluminium Forum in Haikou, on China’s southern island of Hainan. China, a large importer of aluminium as recently as the late 1990s, is now a net exporter. It more than doubled total capacity between ’00 and ’03 to 8.3m tonnes from 3.2m, Xiao Chunquan, a director of the state reform and development commission, said.

Australia’s exports to rise in 2005
Australian aluminum and alumina output volumes are forecast to rise a respective 3.1% and 4.4% in the year ending June 30, 2005, a government report said. Aluminum production is expected to reach 1.94 million metric tonnes, while alumina output should rise to 17.5 million tonnes. Australian export volumes of aluminum are forecast to rise 2.7% to 1.6 million tonnes in fiscal 2005, while exports of alumina are forecast to grow 2.4% to 13.9 million tonnes. Annual export earnings from aluminum are forecast to jump 7.2% to A$3.69 billion, “reflecting a moderate increase in aluminum export volumes and higher export prices.” That compares with A$3.44 billion a year earlier. Small increases in aluminum smelting capacity at the Kurri Kurri and Tomago smelters will support an increase of nearly 3% in export shipments of aluminum. Export earnings from alumina are likely to rise 5.9% to A$4.00 billion in fiscal 2005 from A$1.55 billion a year before. According to Abare, the price of aluminum will fall 4.6% to about US$1,630 a ton in 2005, while spot alumina is expected to drop 14.3% to US$330, from US$385 this year.

Excellent performance on rising price
National Aluminium Company Limited has earned a net profit of Rs.790.31 crore during April to December, 2004 against a target of Rs.444.06 crore. The gross profit during the period was Rs.1,322.60 crore against a target of Rs.750.12 crore and net profit before tax was Rs.1,272.95 crore against a target of Rs.692.40 crore. The company’s net profit has crossed the annual target of Rs.597.62 crore within the first three quarters of this financial year. The gross sales turnover of the company during the first nine months of this financial year was Rs.3,124.49 crore against a target of Rs.2,643.15 crore. During this period, the total export earning was Rs.1,454.43 crore against a target of Rs.1,394.27 crore. This includes Rs. 0.60 crore from sale of special hydrate and Rs.0.13 crore from sale of zeolite. The net profit of the company during December, 2004, was Rs.108.44 crore against a target of Rs.59.19 crore. Sales turnover during the month was Rs.469.29 crore against the target of Rs.317.56 crore.
The Cabinet Committee on Economic Affairs gave its approval for the revised cost estimate - II of Rs.398.36 crore at January 2004 level for the 50,000 tpy rolled product unit of the aluminium major National Aluminium Company Limited. The cold rolling mill of the unit has been completed in March 2002. Commissioning of the other segment of the project, particularly strip casters, will be completed within six months.
The company has taken over International Aluminium Products Limited (IAPL) with a capacity of 50,000 tpy of aluminium alloy coil sheets. IAPL has since been merged with Nalco after obtaining approvals from Government of India. The approved project cost Rs.331.81 crore was revised taking into account the interest on loan and expenditure on take over of leased assets.
Hindalco Industries Limited (Hindalco), the flagship Company of the Aditya Birla Group, has reported a robust performance for the third quarter ended December 31, 2004.
The company’s turnover at Rs. 2,044.9 crore is up by 23 per cent, vis-à-vis Rs. 1662.8 crore attained in the comparable quarter of the previous year. Profit before depreciation, interest and taxes (PBDIT) has risen to Rs. 531.7 crore compared to Rs. 415.8 crore in the corresponding quarter of the previous year. Profit after taxes at Rs. 264.9 crore, has grown by 35 per cent as against Rs.196.0 crore in the earlier year. On a segmental basis, the aluminium business accounted for 44 per cent of net sales and 81 per cent of Earnings before interest and taxes (EBIT), with the balance flowing in from the copper business.
Of the company’s turnover of Rs. 2,044.9 crore, the aluminium business contributed Rs. 901.7 crore, mirroring an 18 per cent increase over Rs. 761.2 crore in the corresponding quarter of the last year. Higher volumes, improved realisations, a shift in the market mix in favor of higher domestic sales and a continued thrust on value added products have been its growth enablers.
In aluminium, realisations improved substantially benefiting from higher international commodity prices during the quarter. EBITDA margins at 44.2 per cent represent a significant improvement when compared to 37.6 per cent reached in the corresponding quarter of the previous year, despite higher cost of inputs like bauxite, caustic soda and CP coke. The copper business’s net sales at Rs. 1,143.2 crore vis-à-vis Rs. 901.6 crore in the comparable quarter of the previous year, reflect a 27 per cent rise, riding on the back of higher international prices and modest volume growth of 3 per cent. However, EBITDA margins fell from 11.0 per cent last year to 9.2 per cent in the current quarter, as realisations fell, caused by a steep duty reduction of 10 per cent, removal of export incentives, higher coal rates and other inputs.
Sterlite Industries’ net profit has risen 50%, to touch Rs 307 crore on a consolidated basis during the third quarter ending December, compared to Rs 204.5 crore. Net sales at Rs 1,969 crore rose 29%, from Rs 1,527.9 crore during the corresponding period in FY04. The consolidated revenue for the quarter at Rs 2,798 crore rose 28% due to higher prices of base metals supported by higher volumes in zinc and copper. Revenues for the nine-month period ended December 31, ‘04 was stated at Rs 7,345 crore, a growth of 25% on a year-on-year basis.
The net profit for the first nine months was Rs 671 crore, a growth of over 35%, over the same period last year. According to the company, the expansion at Balco and the alumina project at Orissa remain on schedule. At Balco, it is planned that some of the pots will be commissioned by early FY06 using imported anodes and power. Post completion of expansion project, primary aluminium capacity of Balco will rise to 350,000 tpa from the existing 100,000 tpa. Malco showed a net profit of Rs. 85.89 million in the quarter ended December 31, 2004 in comparison with Rs.115.90 million in the same period of last year. Gross sales during the period under consideration touched, however, the new height at Rs.881.18 million as against Rs.801.7 million in the corresponding period of the last year.

Outlook
The aluminium sector continues to perform well, with worldwide consumption growth at 8.6 per cent in 2004. The Indian aluminium market has grown by over 10 per cent in the first nine months of the financial year and prospects in the electrical, building and transportation sectors look good, indicating a second double digit growth year in a row for aluminium.