Feb 8: Large-scale "destocking" of aluminium in south-east Asia owing to the currency crisis and the consequent dip in demand has set alarm bells ringing. The crisis has prompted aluminium-intensive industries like automobiles and consumer durables to cut back on production in anticipation of sluggish demand. News reports suggest that reduction of inventory levels by stock clearances and exports has gained precedence over production at companies like Hyundai, Kia and Daewoo in an effort to cushion their bottomlines.All this has prompted analysts to predict a two per cent drop in aluminium consumption for the first quarter of 1998. Which translates into an estimated surplus stock of approximately 0.6 million tonnes globally. A worrying trend, which has begun to manifest itself in the prices of aluminium at the London Metal Exchange (LME).
Aluminium prices, after a sustained uptrend which reached a high $ 1,723 per tonne in August 1997, have dropped almost 14 per cent to $ 1,481 levels in January1998.
Subsequently, the integration between the international and domestic markets has also worried the Indian primary aluminium companies. Companies like Nalco, Hindalco and Indal fear that the import floodgates, if prised open, could lead to a snowballing effect on their bottomlines.
And going by the current pricing trends prevalent in the domestic market, these fears do not appear to be totally unfounded.
Domestic aluminium prices have emulated the pricing trend on the LME, moving up from around Rs 77,563 per tonne to a high of Rs 83,250 per tonne in December 1997. However since then aluminium prices in the domestic market have dropped to Rs 82,563 levels in January 1998, a fall of Rs 687 within the span of one month. More importantly, this situation has also caught the domestic aluminium producers in a catch-22 situation: if they immediately revise prices downward it would result in non-compliance with targets; but maintaining the priceline would lead to a build-up of inventories.
Especially,since the gap between the landed cost of the metal and the local retail price could entice domestic consumers into opting for imported metal. This situation would be well remembered by Nalco which was saddled with an inventory of almost 21,000 tonnes in 1996-97.
But the saving grace currently for domestic producers is the recent tariff hike for import of unwrought aluminium (ingots) from 10 per cent to 20 per cent. At current levels this has rendered the domestic metal cheaper. But the "destocking" factor aside, the bearish outlook for aluminium prices assumes important proportions given the possibility of some major western world producers restarting their capacities. Incidentally, these are the capacities which had been mothballed in 1994 as per the MoUs reached between producers to stem production losses and buoy prices. However, analysts state that the restarting of idled capacities would to a large extent be dependent on not only the prices, but also on how much of the increased output has been hedgedforward.
Assuming that global output at this stage increases by an additional 2.19 per cent, analysts predict a shift from the relatively balanced market of 1997 to a global surplus of around three lakh tonnes. Little wonder then that the oversupply situation would drive prices down. Given this bearish outlook, with aluminium prices on the LME likely to reflect Asian destocking and a subsequent shift in inventories to the West, a dip to the $ 1,300-1,350 levels for the white metal cannot be ruled out. Furthermore with market integration, can the domestic downturn be far behind?
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
