The Hindu Business Line : Aluminium

Aluminium, one of the most popularly traded base metals, currently trades at around $2,036 per tonne at the London Metal Exchange (LME) and Rs 95 per kg at the Multi-Commodity Exchange (MCX) in India. The prices have fallen by about 12 per cent and 8 per cent respectively from previous month’s close in these markets.

The metal occupies the second slot in terms production and consumption, next to steel among industrial metals, and witnessed a boom until recently. Prices were at their peak in July ($3,271 per tonne at the LME and Rs 147 per kg at the MCX). The US and Europe are the major producers and consumers of aluminium. They are closely followed by China. India occupies the fifth position in terms of production.

A better performer

However, aluminium has been among the better performers in the recent commodity meltdown. A comparison with other leading metals shows that prices of copper and nickel have fallen by 38 per cent and 28 per cent respectively over the last one month.

Aluminium, which is a value-add commodity, finds a wide range of uses. Automobile, aviation, consumer durables and construction are the sectors where the metal is extensively used. Until the last two quarters, most of these sectors have been performing satisfactorily. And owing to the comfortable demand, the aluminium market was extremely bullish.

But aluminium prices, having risen by more than 17 per cent in LME and 30 per cent in MCX from January to July, took a down turn from there. Within weeks, concerns about a slower US economy and a global recession gripped commodity investors. With speculative positions being unwound, prices fell sharply. In China, while the demand slowed soon after the Olympics (which saw substantial build-up in infrastructure), inventories rose.

Commodities exchanges across the globe witnessed huge pile-up of physical stocks of aluminium. LME’s stockpiles have risen by 5,67,000 tonnes since the start of year and have now crossed the 1.5 million tonnes.

India’s position

Aluminium is a key industry in India. Domestic prices are closely pegged to prices prevailing on the LME. At present, Hindalco and Nalco are the largest domestic producers of aluminium. The two companies have managed to post moderate profits for the second quarter of this fiscal. Though Hindalco posted a 12 per cent rise in net profit, higher global prices for alumina and a weaker rupee increased input costs. The average cost of raw materials currently hovers at 50-60 per cent of the total cost of production, compared to 45-50 per cent levels last year.

Though aluminium prices have been witnessing a correction over the last few months, how prices unfold from here would depend on how the demand scenario evolves. Nalco, as a measure to stimulate demand, has for a third time this year reduced the price of aluminium ingot..

Global scenario

The scene outside India is no better. China’s biggest maker of aluminium Chalco saw its third quarter earnings fall by more than 50 per cent. The company has cut 38 per cent of its production due to low prices. Production in China has been hampered by other factors such as snowstorms, earthquakes and floods, causing considerable disruptions in power (which is a key input to continuous aluminium production).

Major auto makers such as BMW, Ford, General Motors and Toyota have announced plant shutdowns. This is because of falling car sales these companies have been experiencing over the last several months. Aluminium producers in Argentina, Brazil and Mexico (the other top aluminium producing countries) are experiencing mounting inventories.

Commodity outlook

The current high interest and tight credit situation has constrained working capital for the commodity producers. Production cuts may be the option open to players to bring the aluminium market back into balance.

With a weakening demand outlook globally, and reluctance among high-cost producers to cut production, inventories are likely to rise. With countries trying to infuse liquidity back into system, it remains to be seen over the next few quarters as to how price correction brings demand back in the market.

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