India aluminium producers bank on China demand

India’s aluminium producers are pinning their hopes on China now. Reason for this is that economic activity in China has seen a big rebound following the stimulus package.

With the rise in infrastructure work and a good economic growth, demand for aluminium, which so far lagged other base metals, is on the rise. Analysts and industry experts believe aluminium demand in China will 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 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 2008, 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.

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.

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.

Nalco is one of the cheapest aluminium producers and has volume upside of 30% in both aluminium and alumina due to brownfield expansion.

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.

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