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Cheaper aluminium is also expected to impact Indian smelters

Friday, Sep 17, 2010
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GLOBAL aluminium prices have recovered from their recent lows. But the recovery may be short-lived given the availability of low-cost aluminium from smelters in the West Asia. Cheaper aluminium is also expected to impact Indian smelters including Hindalco and Nalco.


Production capacity has increased considerably in the West Asia in the past decade and more capacity additions are expected in the near future. Cheap gas from oil refineries makes the region an ideal place to set up power-intensive aluminium plants.


The regional capacity is expected to touch 4.2 million tonne per annum (mtpa) by 2013 from the current 3.3 mtpa. Companies like Qatalum and Dubal are aggressively expanding their capacity to meet future demand. India’s current capacity is close to 2 mtpa.


Energy accounts for a quarter of the production cost of aluminium. With the help of cheaper gas supply, aluminium smelters in West Asia can bring down this cost to less than 10%. This serves as a great advantage compared to smelters in Europe, which has some of the highest electricity prices in the world. Chinese producers, who account for nearly one-third of the world’s total aluminium capacity, also face difficulty in securing low-cost electricity from coal-fired power stations.


Hence in the long-run, the low-cost smelting capacity in West Asia may put a cap on aluminium prices. However, prices may rise in the immediate future. According to Navneet Dhamani, senior research analyst at Anand Rathi Research, fund-based buying may underpin aluminium prices in the short-term. At present, 70% of the LME (London Metal Exchange) aluminium inventory is tied up with financial contracts. This inventory is not available for sale in the short-term. Therefore, aluminium prices may inch higher from current levels.


The rate of increase in LME inventories is slowing following the production cuts. This has also supported prices to a certain extent. Companies like Hindalco and Nalco are likely to see the impact of cheap aluminium from West Asia. Any dip in global aluminium prices can put topline of these companies under pressure. Hindalco may see some relief from its subsidiary Novelis though. It is engaged in cans manufacturing and enjoys a near-monopoly, thereby shielding Hindalco from the short-term price fluctuations.

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