Nalco, Hindalco hope to piggyback Chinese demand

Mumbai: With economic activity in China seeing a sharp rebound following the stimulus package, demand for aluminium, which so far lagged other base metals, is on the rise. So much so, analysts and industry experts believe aluminium demand there to grow 15% in 2010. This is expected to benefit aluminium producers in India, much like steelmakers benefited in the lead-up to the Beijing Olympics. China, the world's top aluminium maker, has hit record output for the third straight month. In November, it produced 1.35 mt, up 7.5% compared with 1.26 mt in October. Chalco, China's top aluminium producer with a capacity of 4 mt per annum, has restarted its idle capacity. At the end of October, the company was operating 88% of its primary aluminium capacity in China as against 83% in August. In India, aluminium production increased 15.8% to 0.73 million tonnes (mt) in the first half of this fiscal. Major producers include Hindalco, Balco and now Vedanta Aluminium, besides state-owned Nalco. In a presentation to investors, Hindalco said it witnessed its highest ever quarterly production of aluminium during the quarter ended September. It produced 2.75 lakh tonne of the white metal in the first half of this fiscal, up 8% year on year. The company conceded that early signs of recovery in aluminium prices were visible, but said the large global inventory of 6.5 mt was a concern. In FY08, India's total aluminium smelting capacity was 1.2 mt, which is expected to reach 2.24 mt in FY12. A revival in Chinese demand augurs well. "Aluminium demand in China is expected to grow by 15% in 2010 on the back of revival in construction and auto segments," Jagdishwar Toppo, Nitesh Jain and Bikash Bhalotia of Enam Research wrote in a recent report. The current average cost of the Chinese smelters is $2,000 per tonne and rising, given an increase in prices of inputs like bauxite/alumina and coal/power. "These cost push factors provide a strong floor for aluminium prices," the Enam analysts wrote. Aluminium prices reached an all-time high of $3,291 per tonne in 2008 before correcting sharply to $1,261 per tonne, and have since been on the rise. Just this year, aluminium prices have seen a sharp increase of 48%. According to LME data, the official price of aluminum stands at $2,230 per tonne, while a 15-month buyer contract quotes at $2,368 per tonne. "Indian smelters including Nalco, Hindalco and Sterlite have captive bauxite and power generation capacities, which will help them to keep the production costs low and at the same time reap the benefits of rising aluminium prices globally. Moreover, Indian smelters are on an expansion mode, which will create more supply in the market," said an analyst who did not wish to be named. "Nalco is one of the cheapest aluminium producers and has volume upside of 30% in both aluminium and alumina due to brownfield expansion," Toppo, Jain and Bhalotia of Enam wrote in their report. Analysts, however, feel prices will be capped for sometime as the Chinese market is suffering from overcapacity and has a huge inventory of around 1.5 mt. "Cost of production in China is going up and that will push up the prices globally. However, that may take sometime due to the inventory and increased production," said Ravindra Deshpande, analyst, Elara Securities (India).