The Indian aluminium sector is characterised by large integrated players like Hindalco and National Aluminium Company (Nalco). India has the fifth largest bauxite reserves with deposits of about 3 bn tonnes or 5% of world deposits while its share in world aluminium capacity rests at about 3%. However, the per capita consumption of aluminium in India is abysmally low at less than 1 kg as against nearly 25-30 kgs in the US and Europe, 15 kgs in Japan, 10 kgs in Taiwan and 3 kgs in China, which implies significant potential for the sector. The key consumer industries in India are power (44%), infrastructure (17%) and transportation (12%).
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Customs duty on primary and secondary forms of non-ferrous metals namely aluminium, copper, zinc and tin and other base metals have been reduced to 7.5% from the earlier 10%. |
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The reduction in customs duties on non-ferrous metals would keep a check on a rise in prices, as landed cost of these would effectively reduce, thus reducing the net difference between landed and domestic costs. Thus, in this sense, it is a negative for players like Hindalco, Nalco and Hindustan Zinc. However, the effect of this would be more prominent in times of cyclical downturns. |
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The budget proposal pertaining to the non-ferrous metals has been marginally negative. However, we continue to maintain our positive stance towards the aluminium and copper sectors post the Budget. While we admit that the reduction in customs duty would put pressure on copper margins, over the medium-term, the prospects for both copper and aluminium seem promising. This is on the back of a global economic recovery and a stronger domestic economic growth. Further, the aluminium sector will benefit from impressive growth potential of transport, construction and packaging sectors. The budget proposals favoring the power sector are also a big positive (44% of total domestic aluminium is consumed by power). The global recovery in aluminium demand, led by major economies like the US, Japan and China, is intact. The average prices of these metals, which have been ruling at multi-year highs for sometime now. Therefore, are it is unlikely to weaken much in the medium-term on a YoY basis |
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Reduction in custom duty on aluminum and copper from 15% to 10%
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Lower excise duty to perk up domestic demand. |
| Budget 2003-04 |
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Budget 2004-05 |
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Budget 2005-06 |
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Finance minister has reaffirmed the thrust on infrastructure development by announcing new infrastructure projects.
Peak customs duty reduced from 30% to 25%.
Decrease in freight rate by 5.3%. Confessional freight for short distance transportation.
Surcharge on corporate tax halved from the current 5% to 2.5%. |
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Customs duty reduced from 20% to 15% on copper.
A surcharge of 2% on account of education cess will be imposed on corporate tax. |
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The budget announcement is a negative for copper converters. It must be noted that the customs duty on copper concentrates has been maintained at 5% while that of copper has been reduced from 15% to 10% thus reducing the net effective buffer available to copper converters from 10% to 5%.
Also, the reduction in customs duties on non-ferrous metals is likely to keep a check on a rise in prices as landed cost of these would effectively reduce, thus reducing the net difference between landed and domestic costs. |
| [Read more on Budget 2003-04] |
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[Read more on Budget 2004-05] |
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[Read more on Budget 2005-06] |
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| Key Positives |
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Growth potential: The per capita aluminium consumption in India is less than 1 kg compared to about 3 kgs in China and 30 kgs in the US. The fact that almost 44% of the domestic aluminium is consumed by the electrical sector and there are only about 300 applications for the metal in India leaves a lot of room for the domestic sector to grow. Just to put things in perspective, aluminium usage on the global front is tilted towards transportation and packaging sectors and there are an estimated nearly 3,000 applications for the metal. |
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The China factor: Led by massive Chinese consumption, aluminium prices witnessed considerable strength over the last couple of years and continue to do so. Further, with signs of the US and Japanese economies showing relative strength as compared to last year, the demand for the metal is likely to remain firm in the medium term. Moreover, shortage of aluminum supply on the back of unviable operations owing to high power costs leading to smelter shutdowns would help keep prices firm. |
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The India advantage: Indian aluminium companies are amongst the lowest cost producers of the metal in the world, which is a significant advantage, especially during times of cyclical downturns. Abundant bauxite reserves and access to cheap labour have given the domestic aluminium manufacturers this edge over their international peers. | |
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| Key Negatives |
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High dependence on power sector: The electrical sector consumes a major chunk of the domestic aluminium production. But considering the sticky positions of the State Electricity Boards (SEBs) and uncertainties raised with respect to the smooth implementation of the Electricity Act 2003 tends to keep in question the growth in the power sector. |
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Political interference: Though the Electricity Bill has been passed and investment plans are being firmed up in the sector, regulatory setbacks and other politically favoured issues like distribution of free power could dampen the spirits for investment in the sector. |
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Waning tariff protection: The consistent decline in import duties reduces the net tariff protection for aluminum producers making them vulnerable to cheap imports, which could be detrimental to their financial health, especially during times of cyclical downturns. | |
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