The Indian aluminium industry will come out of last year's slump with better, if mixed, fortunes in the current fiscal, analysts say. Their predictions are based on the fact that many factors behind the decline in profit margins are receding.

From metal-producers to fabricators, from public sector giants to private sector firms, all companies reported falling profits for the year-ending March 31, 1997. Profit-after-tax of the public sector National Aluminium Co Ltd (Nalco), India's largest aluminium metal producer, dropped from Rs 614.56 crore in 1995-96 to Rs 478 crore in 1996-97.

The net profit of Hindustan Aluminium Co Ltd (Hindalco), the largest private sector producer, dipped from Rs 401.14 crore to Rs 390.96 crore. Indian Aluminium Co Ltd (Indal), the largest producer of value-added products, recorded a fall in profit from Rs 111.73 crore to Rs 59.19 crore.

However, net sales of Nalco increased from Rs 1609.62 crore to Rs 1769.41 crore during the same period, while that of Hindalco declined from Rs 1253.76 crore to Rs 1157.08 crore and of Indal from Rs 1048.01 crore to Rs 1025.72 crore.

The major factors behind this decline were: slack in domestic demand growth, drop in prices of the metal both in domestic and international markets, a price war, cost of critical input like power, high cost of capital and the minimum alternative tax (MAT). However, all these factors are not applicable equally to all producers.

In India, per capita consumption of aluminium is still a dismal 0.7 kg, as against 27.5 kg in an advanced country like the United States and 2.1 kg in Brazil, a developing country. In other words, it is about 3 per cent of the global average and a fourth of the average consumption in other emerging markets. According to the "Minerals & Metals Review" (August 1996), demand for aluminium is expected to rise by 2.2 per cent in 1997 and 1.9 per cent in 1998. This calculation was based on the assumption of a 3.6 per cent demand growth in 1996.

But this will not happen and hence the demand growth this year will be higher compared to 1996. Electrical applications account for the largest consumer segment. The automobile and consumer goods sector are witnessing a rapid growth in India and the changing consumption pattern is expected to boost aluminium demand. The electricals sector will continue to be the biggest consumer, considering that during the Ninth Plan Rs 2,28,000 crore will be invested in 57,000mw capacity addition, Rs 48,000 crore in the extension of high-voltage transmission lines and Rs 56,000 crore in the expansion and revamp of distribution lines. According to an estimate, consumption by the construction sector alone can be increased by 200,000 tonnes per year. Right now, aluminium finds only around 300 applications in this sector in India, against 3,000 in developed countries.

Meanwhile, Indian producers are expanding capacities. Nalco will be investing Rs 3707.92 crore for expansion of its mines, refinery, smelter and captive power plant during the Ninth Plan. This will include its capacity expansion from 230,000 tonnes to 345,000 tonnes.

Hindalco is setting up a 2,50,000-tonne project at Koraput in Orissa at a cost of Rs 7,000 crore under the name of Aditya Aluminium. Indal is finalising plans for expansion of its Hirakud capacity. But none of the expansions will be completed before the year 2001, so demand will remain higher than production.

The fortunes of the Rs 5,000-crore domestic aluminium industry are closely linked to the fluctuations in prices on the London Metal Exchange (LME), although Indian producers are cushioned somewhat by inherent competitiveness. They have access to the best-quality bauxite -- the raw material-and cheap labour. For those who already have captive power plants, energy cost is low. After a low of $1,286 in October 1996, LME prices of aluminium have started moving up and are currently in the range of $1,600-1,640. This recovery was mainly due to lower LME inventories, which dropped from 965,000 tonnes in October 1996 to 868,000 tonne in March 1997 and are showing further declining trends. Indian producers were carrying inventories of about 40,000 tonnes in the latter half of 1996. This is more than three times the normal level.

Industry sources believe that it will take about three months from now to clear the inventories and hence a price hike, however imperative it may be, may not take place immediately. But they at the same time say that Nalco and Hindalco are likely to fix their prices at Rs 61,650 and Rs 65,800 a tonne. However, even the current LME rate will not be conducive for increasing profits, industry sources believe. According to a study by Anthony Bird Associates, new smelters that are coming up cannot be competitive at rates lower than $1700-1900 per tonne. Aluminium is the only sector which is enjoys government patronage in the form of increased customs duty on metal and scrap - the government has hiked the duty from 10 per cent to 20 per cent. This will benefit producers of primary metal like Nalco and Bharat Aluminium Company Ltd (Balco). On the other hand, fabricators like Indal -- which imports 40 per cent of its input needs -- will be hard hit by this decision. "Such a tariff regime," pointed out Indal's vice-chairman and managing director Tapan Mitra in the 1996-97 annual report of the company, "if persisted with, may prove to be a major disincentive to the value-adding semi-fabricating industry in India." He expressed the apprehension that "India may become a dumping ground for aluminium sheet and foil produced by international manufacturers who not only have the advantage of scale, but also access to lower priced metal."

Energy constitutes 40 per cent of total production cost and around 16,000 units of power is need to produce just one tonne of primary metal. Moreover, the industry requires uninterrupted power supply. Most Indian manufacturers, having suffered from the expensive and erratic power supply, have now realised that captive generation is a must.

Nalco and Hindalco have a clear advantage here, as both have captive power units. Against the average power cost of Rs 2.50 per unit in India, Nalco's cost is 33 paise, the lowest in the world, while Hindalco's is 71 paise. Nalco's captive units meet its entire power need, while Hindalco has to buy just 10 per cent of its power from outside agencies. By next year, Hindalco will have another captive power unit and will not have to buy any power.

Indal is at a distinct disadvantage, with captive facilities supplying only 33 per cent of its total need, and a power cost of around Rs 1.75 per unit. Its Belgaum facility in Karnataka, is the worst hit. Indal is setting up a 100mw naphtha-based plant at Belgaum, but the government has not yet given the naphtha linkage. The captive power unit will enable Indal to re-energise 40,000 tonnes of smelting capacity. However, the power unit is not expected to be commissioned before end-1999.

Faced with a demand slump last year, producers launched a price war. In the past it has faced many crises and has recovered each time. Now also it will recover from the present position and prosper This year, a number of producers have agreed to avoid price wars. In fact, they may increase prices as demand is picking up.

For Indal and Hindalco, freight costs will continue to be major worry since their units are located away from raw material bases. The proposed hike in petroleum prices coupled with the new method of fixing sales tax on the maximum retail price will also hit them.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.