A new sector report by Crisil indicates that Indian aluminium producers are likely to sail through the COVID19 impacts smoothly with rising aluminium exports, lower input costs, and cost efficiency strategies curated by the industry.
"The domestic sales loss has been offset by companies adroitly exporting more, thanks to high cost-competitiveness that stems from improved sourcing and lower input costs,” said the report.
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At the beginning of the financial year 2021, the aluminium price was hovering 4-years low at US$ 1,450 per tonne on the London Metal Exchange, while the domestic demand was bleak due to the COVID-19 pandemic-driven lockdown. Although this will squeeze bottom lines this fiscal, but efficient cost structure and adequate cash will lend support to credit profiles and help weather the viral disruption, suggested the report by Crisil.
Production of aluminium remained steady during the lockdown, being an essential commodity, but the domestic demand plummeted, primarily from the power transmission, automobiles, and construction sectors.
Crisil in its report says cheaper e-auctioned coal, which is an important raw material for aluminium production must bring down the smelting cost.
“…e-auctioned coal has seen average premiums falling steadily from a high of 131% in December 2018 to 36% as of March 2020. This has lowered the cost of electricity, which accounts for ~40% of the cost to produce aluminium,” said the Crisil’s senior director, Manish Gupta.
The report also says that the companies’ strong cash buffer, which is three times their debt obligations, will help them overcome the COVID-19 crisis.
Naveen Vaidyanathan, associate director, Crisil said that although the domestic and global aluminium demand is expected to witness degrowth this fiscal, strong demand fundamentals in the post-COVID era are likely to boost the global demand by around 3 per cent annually.
Domestic aluminium demand, on the other hand, is estimated to grow 5 per cent, owing to increasing usage in the power transmission and automobile sectors. This bounce-back may see aluminium makers restore their financial metrics.
“The key monitorables in the road ahead will be the extent of lockdown and pace of economic recovery, which can curb demand for, and prices of, aluminium. That, in turn, would have a bearing on the credit profiles of producers,” the report added.
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