Domestic demand set to keep Nalco, Hindalco afloat

Being a part of the world’s lowest-cost producers’ quartile, the day has been saved for our National Aluminium Company (Nalco) and Hindalco. Even in this highly cost-efficient group, not every constituent is doing at this point anything more than just breaking even; such has been the steep fall in aluminium prices in the past four months. It is only to be expected that the world economic outlook being what it is, the aluminium market will see a marked fall in open interest and liquidation of long positions. Of this, we are seeing ample demonstration on the London Metal Exchange (LME) and the Shanghai Futures Exchange (SHFE). In fact, the mood is grimmer at SHFE than at LME. In the first three quarters of 2008, China alone had a share of over 10.3 million tonnes in the world aluminium production of 30.373 million tonnes. Even though the energy cost in China is high and the country does not boast of good quality bauxite deposits, it considered it wise to lift alumina refining and metal smelting capacity to 25 million tonnes and 15 million tonnes respectively in a drive the world has not seen before. The global meltdown and its own GDP growth slipping by a few notches will now put to question the wisdom of building such huge steel and aluminium capacity. The World Bank says the next year’s Chinese growth of 7.5 per cent will be the lowest in as many as 19 years. While China itself admits that the steel industry will be better off if nearly 100 million tonnes of polluting capacity is put to sleep, the fact remains that at the current LME price of $1,600 a tonne, hardly any Chinese smelter is able to recover costs. Monitoring agency CRU International will go further to say all smelters in China are losing money. Now that the National Bureau of Economic Research has confirmed that the US slipped into recession in December 2007 after experiencing continuous growth for six years and a recovery not in sight, aluminium industry officials say the metal price could fall further. At the same time, no one is sure where the bottom will finally be found. The incessant pounding of the metal on the exchanges has got much to do with US monthly auto sales hitting the lowest level since 1982, the uncertain future of GM, Ford and Chrysler, German car sales back to the 1990-level and the near paralysis of building construction in the West. Of the world aluminium use of 37.838 million tonnes in 2007, the share of the transportation sector was about 30 per cent and of the construction sector over 20 per cent. No doubt scorching over 20 per cent annual growth in the auto industry for six years in a row till the last autumn was a consideration for Chinese aluminium makers to grow smelting capacity at record speed. China is to end this year with 10 million vehicle sales. But as the Chinese auto industry is facing a jarring slowdown since autumn, it, like its US counterpart, is seeking a rescue package from the government. A setback in car production in China is causing shrinking demand for aluminium. What is further adding to the agony of the world’s biggest aluminium producer is the reduced level of building construction activity. Nalco Chairman C R Pradhan says at current aluminium prices all smelters, except for the highly cost-efficient ones, are operating “well below the cost support level”. There is no escaping the fact that as we move forward, more and more smelting capacity around the globe will become unviable. Pradhan draws attention to mounting aluminium stocks with LME and SHFE to highlight the continuously falling global demand. At the last count, LME stocks were close to 1.85 million tonnes and SHFE at over 1.8 million tonnes, both at their highest since the end of 1994. But then aluminium is a part of the secular price fall in base metals. The only saving grace for aluminium, as industry officials say, is that raw materials costs are also falling. The price decline in the case of alumina is from $460 a tonne to less than $175 a tonne in six months. Similarly, prices of carbon cathodes used in smelters are easing. Equally importantly, cathodes have ceased to be a scarce commodity. It does not leave to imagination that with so much blood in the commodity street, Nalco and Hindalco, irrespective of their levels of efficiency, will see their profits eroding in the second half. After all, Indian aluminium prices take their cue from LME. Fortunately for Nalco and Hindalco, as the Indian economy will be growing at about 7 per cent, the growth rate of domestic demand for aluminium should remain more or less intact. As the pressure on China will mount to dispose of surplus aluminium in the world market, India must guard against any future dumping of the metal here. It is in this context that Indian producers want raising of customs to 10 per cent on aluminium as also on scrap. ---www.business-standard.com