India's investment in aluminium on track as prices set to rise

Rising costs in the aluminium business and sluggish market conditions have crimped the margins of aluminium firms in India. Though three firms in the sector have posted a decline in third quarter earnings, new investments in ramping up production are clearly on track.

Aluminium, on the London Metal Exchange (LME), has been falling since the beginning of the year. A similar decline has been witnessed in the core earnings and profits of alumimium firms in India. India's biggest state owned producer, National Aluminium Company (Nalco) posted a 80% decline in third quarter profit as prices of the metal slid and energy costs rose. Net income fell to $10.4 million.

Similarly, mining major Vedanta Resources posted a 5% dip in core profit its December quarter, hit by weaker performances at its aluminium operations. Earnings before interest, tax, depreciation and amortisation (EBITDA) were $848.4 million for Q3.

Indian non-ferrous metals producer Hindalco Industries EBITDA earnings for aluminium was also down to 59% at the end of the third quarter, as against a robust 81% at the end of the first quarter. Hindalco's net profit for Q1 was $131 million (Rs 644 crore), Q2 was $102 million (Rs 503 crore) and in Q3 the firm posted a net profit of $91 million (Rs 451 crore).

Aluminium prices on the London Metal Exchange on the other hand, has fallen from $2603 per tonne to $2091 per tonne in the same nine month period.

To counter the downtrend, Nalco has offered a discount of $30.45 per tonne on major categories of aluminium products. Earlier this month, the company had raised prices by $40.8 (Rs 2000) per tonne across all products after prices rose overseas.

Moreover, in order to maintain a healthy debt-equity ratio, the Aditya Birla Group firm Hindalco Industries is all set to issue up to 150 million preferential warrants to the promoters and raise $407 million. Its board has approved the offer and the money is to be used for various expansion plans.

Though aluminium prices were somewhat depressed in the latter half of 2011, companies said the are witnessing a small recovery early 2012 with better prospects in the coming months.

"The demand from the infrastructure segment is rising in Asia. Though China remains a major force and both the Chinese and India economy are still growing, demand from other markets including the US, is also on the rise. In April 2011, aluminium LME was around $2700 per tonne and in December 2011, it was around $2026 per tonne. By March 2012, prices at the LME should be above $2,400 a metric tonne,'' said Milind Sanghvi, analyst at a broking firm.

S K Roongta, former chairman of the Steel Authority of India who is now enrolled in taking aluminium to new heights for Vedanta Aluminium told a newswire agency that India's aluminium growth story is just getting unfolded. Since India is home to one of largest reserves of coal and high grade bauxite in the world, the country could realise its potential and become a global hub for aluminium, he said.

ECONOMY GROWTH
Aluminium production hinges on backward linkages to bauxite and coal. Per-capita consumption in India is just 1.3 kilo as compared with 14 kilo in China. Though the power sector consumes a major share of aluminium, as the Indian economy grows players state that consumption in transportation, construction, consumer durables and packaging segments are set to grow faster.

Though globally close to one million tonne of aluminium production is shut because of the falling LME prices, most companies in India have lined up robust capacity expansion plans in the aluminum segment. Analysts state with the successful completion of projects and start up of key mines, feeding the expanded capacities will be the key to growth.

Mining major Vedanta's largest greenfield investment in Jharsuguda in Odisha is being developed as an aluminium and power hub. The company is putting up a new smelter of 1.25 million tonnes per annum capacity in Jharsuguda and another smelter of 0.325 million tonnes per annum at Balco. Once commissioned, both the smelters will produce around 2.5 million tonnes per annum of aluminium.

In November last, Indian aluminium extrusion manufacture and exporter Jindal Aluminium said it would pump in $91 million to establish two plants in Karnataka to manufacture aluminium sheets and foils, and produce powder coated and anodised materials. One of the plant has a capacity of 30,000 tonnes a year and is expected to commence operations mid 2012.

At the end of last year, Nalco completed the second phase of its expansion at an investment of $899 million (Rs 4402 crore.) Post expansion, Nalco has an alumina refinery capacity of 2.1 million tonnes per annum and an aluminium smelter of 4.6 million tonnes per annum. It also has bauxite mining capacity of 6.3 million tonnes.
The Bhubaneswar headquartered Nalco is India's third largest aluminium producer. Although it is a small player in the global metal market, its prices serve as an international benchmark. The firm has captive bauxite mines.