Indian aluminium industry
Shining to grab global opportunities

India is endowed with mineral resources. Bauxite reserves are basically available in the states like Orissa, Andhra Pradesh, Madhya Pradesh, Gujarat, Maharashtra and Bihar. Minerals and metals rich India has the fifth largest bauxite reserves in the world. About 89 per cent of the recoverable reserves of bauxite in India are of metallurgical grade. Bauxite is converted to alumina in alumina refineries and through a smelting process aluminium metal is extracted. Aluminium – indispensable and widely used was often called the common man’s metal. This was due to the cheap availability of abundant bauxite reserves in India where raw material accounted for 35 per cent of the cost of production. The aluminium industry that emerged in India in early 1940s, over the years has remarkably grown. Its production has progressively gone up in the public as well as the private sector.

Background
In March 1989, the domestic aluminium industry was de-regulated. It was freed from the shackle of price and distribution control which was imposed by GCI’s Aluminium Control Order, 1970. Few years down the line, in June-Jly 1991, the New Economic Policy of the Government of India was announced. With the introduction of the economic liberalization policies, the industry was virtually freed from the licensing and control regime. That was indeed the turning point for the industry. Each of the aluminium related player began to feel that the Indian economy has finally opened up. The liberalization process had not only started but the process of economic reforms in the country had become irreversible. Consequently, a number of new players entered into the field, particularly in the downstream sector viz. aluminuium sheet, foil and extrusions resulting in significant new capacity additions.
Though, the industry is 65 years old, India’s share of global aluminium business is still quite nominal, less than 2.5% in terms of aluminium production and consumption. Of the total world aluminium consumption of 28 million tons in 2003, India’s consumption was only 0.65 million tons. Even India’s per capita aluminium consumption is as trifle as 0.6 kg against the average of 6 kgs in the developing economies and over 12 kgs in the developed nations. These statistics merely indicate how much of catching up is required by the industry to gain a significant position in the world aluminium map. There were several factors like non-availability of bauxite leases and coal blocks, high duties and taxes, high power tariffs, non-availability of adequate economic power, inadequate infrastructure, high capital cost, too many procedural/bureaucratic hurdles etc. All these factors had indeed deterred the natural growth of the aluminium industry.

Consolidation
The global giants of the industry like Alcan of Canada, Alcoa of the US had opted for non-organic growth path. They also chose the strategic growth path of mergers and acquisitions (M&A) rather than pursuing greenfield expansions. For example, in 2000-2001, Alcan, then No.2 of the industry had proposed a three-way merger – Alussuise of Switzerland and Pechiney of France merging with Alcan of Canada. This merger was proposed with a view to make Alcan the No.1 in the industry having a global turnover of US$22 billion. Today, Alcan is all set to close some of Pechiney’s plant because of a number of hurdles. Alcan also intended to leverage the state-of-the-art technologies developed by Pechiney and Alussuise. This merger proposal was not approved by the European Commission in consideration of likely adverse impact on competition. Only Alussuise could merge with Alcan in 2001. However, Alcan management did not give up 3-way merger proposal. They logically prevailed upon the European Commission and ultimately Pechiney was amalgamated with Alcan in 2003.
To-retain its pre-dominant market position, Alcoa, the number one in the industry in the ninetees, also wanted to grow through merger and acquisition. About two years ago, Alcoa acquired Reynolds of USA, Reynolds is particularly strong in the foil sector. But, due to the ultimate 3-way merger of Alcan, Alcoa could not retain its number one position in the history.
The domestic aluminium industry was also not an exception to this global trend of consolidation. Aditya Birla Group in pursuance of its long term goal of becoming No.01 player in Asian Aluminium sector, had been looking for opportunities prefereably through merger and acquisition route. The company succeeded in merging its group company Indal with itself in a swap ratio of 1:7. In early 2000, Alcan intended to dispose of its holding in Indal (54.6%). Hindalco, the flagship company of the Aditya Birla Group acquired Alcan’s holding in Indal in March 2000. Later, in phases, Hindalco acquired another 42% shares of Indal through public offering and today Hindalco holds 96.6% share of Indal. With the acquisition of Indal, HIndalco is the No.1 player in the domestic aluminium industry today.

The consumption pattern
The consumption pattern of aluminium in India is different from that of global. Electrical, consumer durable, transport, building and construction, industrial and packaging are the sectors that widely use aluminium. In India, the demand has been predominantly from the electrical sector that is the largest end user of aluminium in India. It accounts for almost 35 per cent of the total aluminium demand. One of the reasons for the demand to skew towards the electrical sector was the Alminium Control Act (1970) stipulating that 50 per cent of the aluminium production by any manufacture should be Electrical Grade (EC). It also fixed the retention prices for this grade of aluminium.

Leading producers
Three producers account for the total production of aluminium in India, namely Nalco, Birla-controlled Hindalco and Indal (recently merged entities) and Sterlite-managed Balco and Malco. These are integrated producers from bauxite mining to metal production. Nalco and Hindalco are the lowest cost producers of aluminium in the world. In spite of this they have deliberately kept very high prices of aluminium in the domestic market taking advantage of high customs duty. But high customer duty has been cut by 5 percent in the last annual Budget which help bringing down price by Rs. 1000 accross all sectors. Moreover, integrated producers like Hindalco with a presence in value added products are in a better position to capitalize when compared to secondary or downstream manufacturers in India. The irregular supply of primary aluminium metal, the price volatility in primary aluminium procurement and the depreciation of the rupee (in case of imported metal) have affected the viability of the downstream manufacturers.

High price leaves users into lurch
Procurement of secondary products in various forms like rolled products, extruded products, foils wire rods, aluminium wheels in automobiles, etc is not cheap. Today, aluminium no longer remains the common man’s metal. According to industry experts, till 1994 there was shortage of aluminium in the country. It was also a controlled item where in the Ministry of Mines, a Controller of Aluminium used to fix the price under the quota regime. Nalco started production in 1986. Once it came into full production by 1994, the country became self-sufficient in aluminium. With the introduction of liberalization policy, the government abolished the post of the Controller of Aluminium. Customs duty on aluminium was initially fixed high till early 1990s. This was done in order to promote Nalco so that the secondary producers would not import aluminium and thus buy it at the rate sold by Nalco. Other primary producers like the Birlas also hiked their price in spite of very low cost of production. Customs duty which was at 25 per cent , however, reduced by Dr. Manmohan Singh to 10 per cent in 1994. Thereafter, customs duty on the import of aluminium was progressively increased to 33.4 per cent by 1999. However, in 2002, this duty was reduced to 15 per cent and further to 10 per cent in the current Budget.

A costly affair
When adding duty to the basic price, the total becomes highly expensive. Even though, the international price is lower than the domestic price but when high customs duty is added to it, the margin of difference between the two is very little. The secondary manufacturers complain that high customs duty does not enable them to avail the lower international price as imports are virtually banned. They are lifted with no choice but to purchase the metal from the domestic primary producers. According to them, this move by the government is helping the primary producers in keeping their profit margins as high as 46 per cent. On the other hand, the downstream manufacturers are incurring heavy losses due to the high price and poor demand. This is resulting in consumers switching over to substitutes of aluminium products.

Secondary producers
Its quite emphasizing to note that secondary producers are kept in abeyance by the government and the main integrated producers. The repeated appeal by the secondary manufacturers has fallen into deaf ears. Assurances given to reduce the custom duty further, reconsider domestic prices and follow the National Mineral Policy have never been implemented. The fear of closure of the secondary manufacturers industries and the substitution of aluminium is looming large. Making the indispensable aluminium, dispensable in the domestic market by keeping artificially high prices in going to harm a lot more sectors then just aluminium. It is high time the government looked into the matter with all seriousness.

Conclusion
Re-processing of aluminium scrap is quite difficult as the virgin metal is readily available in the market and its cheaper compared to the investment made on the plants and machinery and manpower for reprocessing. Apart from this, collecting scrap like aluminum cans after use becomes quite difficult. In the states like the US, the aluminium scrap has not placed of prime importance. Moreso, re-melting and re-processing of aluminium scrap is the major contributor to the environmental pollution. Thirdly, after all blanced expansion come into stream India will be a major player on the world aluminium arena.