Rising input costs, soft LME prices to dent aluminium makers' profits

A spike in costs of key ingredients, with bearish London Metal Exchange (LME) prices, threaten to cut margins of Indian aluminum makers in the near term. LME aluminium prices had fallen to $1,775 a tonne on Monday, after scaling a seven year-high of $2,718 last April. The trend is disquieting for the three primary Indian producers — National Aluminium Company (Nalco), Vedanta and Hindalco Industries. Their smelting cost is around $2,000 a tonne.

 

“The cost of production of smelters with own alumina will be below $2,000 but still affect the profitability. Other than input prices coming down, we do not see any other avenues for cost reduction. At these prices, at least 50 per cent of smelters globally will be making loses. Hence, we expect either prices to pick up or some capacity shutdown to happen,” said an official at a large producer. With this development, input commodity inflation ensures a tightrope walk. Between April and October 2018, coal costs for the non-regulated sector, primarily aluminium and cement, rose by 20 to 34 per cent. Aluminium producers are also facing recurring coal shortage, with the dry fuel increasingly diverted to meet the power sector’s requirement.

 

Then, the trade war between the US and China has meant a near-blocking of Chinese import into the US. So, China will be looking for alternative emerging markets for its produce; India will be most vulnerable to this, especially in the downstream segment.

 

Indian downstream manufacturers are already at a disadvantage vis-à-vis the metal (raw material) prices. China’s SHFE (Shanghai Futures Exchange) price typically lagged LME’s by a little over $300 a tonne in 2018-19 and this is expected to get worse in FY20, if the government doesn’t take any preventive measures, the official said.

 

Data from the Directorate General of Commercial Intelligence and Statistics shows Chinese aluminium import into India having risen 62 per cent year-on-year in the first eight months of this fiscal. The share of import in total Indian aluminium consumption has reached 60 per cent.


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