Aluminium & aluminium products industry posts sharp expansion in margins in

December 2013 quarter

Net sales up by a mere 1.7% y-o-y

The aluminium & aluminium products industrys PBDIT margin expanded from 1.5
per cent in the December 2012 quarter to 10.8 per cent in the December 2013
quarter. The industry recorded net profit amounting to 5.7 per cent of total income
as against losses amounting to 7.7 per cent of total income incurred in the year ago
quarter. The improvement in margins was largely on account of lower raw material
and power & fuel expenses.

During the December 2013 quarter, the industrys sales grew, albeit by a marginal
1.7 per cent. Poor off-take and subdued growth in realisations impacted the growth
in the industrys sales.

Nalco, the largest company in the industry in terms of sales, registered a 2.9 per
cent fall in sales in the December 2013 quarter. This was mainly on account of a 21
per cent fall in the companys primary aluminium output. The company produced 79
thousand tonnes of primary aluminium during the December 2013 quarter, as
against 100 thousand tonnes produced in the year ago quarter. The companys
alumina hydrate output, however, increased by 17.4 per cent from 397 thousand
tonnes to 470 thousand tonnes. This helped restrict the fall in overall sales.

Most downstream companies too performed poorly during the December 2013
quarter. Of the 16 downstream companies that have so far declared their December
2013 quarter results, nine recorded a fall in sales. While Ess Dee Aluminiums sales
fell by 3.6 per cent, that of Hind Aluminium declined by 0.7 per cent. Sudal
Industries and Maan Aluminium recorded an over 20 per cent fall in their sales
during the quarter.

In a stark contrast, net sales of Sundaram-Clayton and Sturdy Industries rose by a

sharp 24.8 per cent and 58.6 per cent, respectively, in the December 2013 quarter.
PG Foils recorded a 20.2 per cent increase in sales during the quarter. A strong
growth in sales by these downstream companies helped the industry record a rise in
sales during the quarter. These companies recorded an increase in sales on the
back of higher volumes as growth in realisations remained muted during the
quarter. Weakness in international prices put pressure on domestic prices.

The industrys operating expenses (after adjusting for change in stock) fell by
around 12 per cent during the December 2013 quarter. The industrys raw material
to sales ratio contracted to 37.9 per cent from 43.9 per cent in the year ago quarter.
This was mainly on account of a 8.8 per cent fall in raw material expenses of Nalco.

The industrys power & fuel expenses fell by a sharp 11.2 per cent during the
December 2013 quarter. Aluminium production is power-intensive business and coal
is the main ingredient to producing power. Nalco has a captive power unit and
depends largely on Coal India for the supplies of coal. An improvement in supply of
linkage coal helped Nalco reduce its power & fuel costs. The company was able to
reduce the use of costlier imported coal. Besides, lower production of aluminium
partly reduced the companys power requirement.

Domestic aluminium prices to rise by 3.3% in 2014-15

Capacity additions, high inventory at LME to cap rise in prices

Aluminium prices on the London Metal Exchange (LME) slid to a four-and-a-half year
low of USD 1,641.5 per tonne on 4 February, 2014. Prices have tumbled more than
nine per cent since April 2013. Subdued demand, strengthening US dollar, scaling
back of quantitative easing programme and new warehousing rules are some of the
factors that have been affecting international aluminium prices for quite some time
now. We expect international aluminium prices to remain under pressure in the near
term.

Because aluminium is traded across boundaries, prices in the domestic market

enjoy high correlation with their global counterparts. Weakness in international
prices, coupled with subdued demand put pressure on domestic aluminium prices
since the beginning of 2013-14. Depreciation in the Indian rupee as against the
USD, however, supported prices. We expect the industry to end the year 2013-14
with a 3.5 per cent rise in prices.

Demand for aluminium is expected to improve in the domestic market in 2014-15.

Yet, we expect the rise in domestic prices to be restricted at 3.3 per cent during the
year. Increase in global production capacity and high inventory at LME is expected
to cap the rise in prices.

The smelting capacity in India is expected to expand by 1,094 thousand tonnes to

2,843 thousand tonnes by March 2015. Besides, significant low-cost capacities are
lined up for commissioning in the Middle East and China. The incremental capacities
will add to the already burgeoning global supplies, thus putting pressure on prices.

Similar scenario existed in the preceding year. The global primary aluminium
production recorded by the International Aluminium Institute (IAI) was 49.7 million
tonnes in 2013, up four per cent on the 47.8 million tonnes produced in 2012. The
growth in production came in the backdrop of muted demand, which aggravated
rising inventories and put pressure on prices.

The inventories of 5.4 million tonnes lying at the LME are tied up in investment
deals. Inventories at LME-registered warehouses surged after aluminium and other
metals became financing tools in the wake of global financial crisis. Producers sold
or pledged metal to traders and banks to raise working capital. Funds found it
profitable to hold on to the stocks due to low interest rates and warehouse charges.
This increased wait times for physical buyers at warehouses. In November 2013, the
LME unveiled new warehousing rules to cut wait times. According to the new plan,
the warehouses registered with the exchange will be required to ship more metal
than they take in if waiting time for deliveries exceed 50 days. The new rules, likely
to be effective from April this year, turned investors cautious as it could result in a
flood of excess aluminium from over-stocked warehouses, adding to the already
surging global supplies.

Primary aluminium production to rise by 8.3% in 2014-15

Capacity additions and improvement in demand to aid growth in production

As per the data released by Ministry of Mines, the domestic primary aluminium
production fell by a sharp 11.1 per cent during April-October 2013. This was mainly
on account of a sharp 23.3 per cent and 22.2 per cent fall in primary aluminium
production of Hindalco Industries and Nalco. Although we expect Nalco and
Hindalcos output to improve in the coming months of 2013-14, the improvement is
unlikely to be significant enough to recover the production lost during the first eight
months of 2013-14. We expect the industry to end the year 2013-14 with a 7.7 per
cent fall in production.

We expect the domestic primary aluminium production to return to growth in 2014-

15. Capacity additions coupled with an expected improvement in demand are likely
to spur the growth in primary aluminium production during the year 2014-15. We
expect the industrys primary aluminium output to grow by 8.3 per cent during the
year.

The domestic primary aluminium smelting capacity is expected to expand to 2,843

thousand tonnes by March 2015 from the current 1,749 thousand tonnes. Balco is
set to add aluminium smelting capacity of 325 thousand tonnes per annum at Korba
in Chattisgarh. Hindalco is set to more than double its aluminium smelting capacity
of 506 thousand tonnes to 1,275 thousand tonnes. These companies are already
operating at high utilisation levels. Additional capacities being put up by these
companies are likely to push up the industrys output.

Besides, higher availability of coal is also likely to aid the growth in production.
Aluminium production is an energy intensive process. The amount of energy
required to produce one tonne of aluminium is approximately 15 MW hours. For
meeting the huge power requirement, most aluminium smelters are equipped with
their captive power plants. Coal is the major input to these power plants. Coal
availability in the country is expected to improve as coal production and imports are
expected to grow at a healthy pace in 2014-15. As also, the clearances anticipated
for captive coal blocks are likely to benefit the industry in 2014-15.

Due to constraints in supply of coal, producers such as Nalco had to cut their
production during April-October 2013. Purchasing electricity from other power grids
would have proved costlier.

The demand for aluminium primarily comes from power, automobiles and
construction sectors. The demand from these sectors is likely to be healthy in 2014-
15. The power sector is set to add a capacity of 23,135 MW during the year. Sales of
passenger cars and commercial vehicles are expected to grow by 4-7 per cent in
2014-15, after falling by an expected 3-12 per cent in 2013-14. A gradual pick-up in
real estate, industrial and infrastructural activity is also expected to push up the
demand for aluminium in 2014-15.

MoEF denies stage-II FC for Vedantas bauxite mining project in Orissa

In August 2013, the mining proposal was nixed by 12 gram sabhas in Niyamgiri

The Ministry of Environment & Forests (MoEF) has denied granting green clearance
to the Vedanta Aluminiums proposal of mining bauxite at the Niyamgiri hills in
Kalahandi district of Orissa. The denial by MoEF is expected to impact the long term
sustainability of the Vedantas 1 million tonne Lanjigarh alumina refinery in
Kalahandi as well other expansion projects planned in the state.

The 3 million tonne bauxite mining project at the Niyamgiri hills was proposed by
the Vedanta Group jointly with Orissa Mining Corporation (OMC) in 2005. It was to
feed Vedantas alumina refinery plant at Lanjigarh, in Kalahandi district, Orissa.
Investment in the bauxite mining project at Niyamgiri was estimated at Rs.1 billion.
The state government had recommended 660.749 hectares of Niyamgiri bauxite
mines in favour of OMC, which had reserves of around 80 million tonnes. Out of the
total area, 353.14 hectares are reserved forest.

Stage 1 forest clearance (FC) for the Niyamgiri project was granted in 2005 while
environment clearance (EC) was accorded to the project in April 2009. However, the
MoEF in August 2010, rejected stage II FC for the project on the grounds that it
violates the fundamental rights of the Dongria Kondhs, a tribal group living in the
project affected area, and also their right to inhabit and use the forests as
traditional forest dwellers under the Forest Rights Act (FRA). The plan to mine a 7
sq-km area on top of the Niyamgiri hills held sacred by this tribe violates their right
to religion.
OMC filed an Interlocutory Application (IA) in the Supreme Court (SC) in March 2010,
challenging MoEFs decision. Later, in July 2012, the EC was also cancelled stating
that it will lead to depletion of green cover in the area.

In April 2013, the Supreme Court (SC) ordered the state government to seek gram
sabhas vote on whether it affects the cultural and religious rights of the tribals and
forest dwellers living in Rayagada and Kalahandi districts. When a referendum was
conducted in July-August 2013, all the gram sabhas of the selected twelve villages
unanimously rejected Vedanta Aluminiums proposal of mining bauxite. As per
media reports, the recent MoEF order is based on the referendum of the gram
sabhas.

Domestic aluminium prices continue to fall in December 2013

Subdued demand and weak international prices to be blamed

Hindalco, the largest primary aluminium producer in India, reduced its aluminium
ingot prices by 2.3 per cent to Rs.149,617 per tonne in December 2013 as
compared to the preceding month. Nalco, another large primary aluminium
producer, reduced its aluminium ingot prices by three per cent to Rs.139,508 per
tonne. Ingot prices in the Mumbai market fell by two per cent to average at
Rs.146,238 per tonne during the month.

Domestic primary aluminium producers have been reeling under the pressure of
high input costs. In spite of this, the companies downwardly revised their product
prices for three months in a row. Subdued demand in the domestic market and
weakness in international prices have been forcing domestic manufacturers to cut
their product prices.

Slowdown in key consumer industries of aluminium such as transportation,

consumer durables and construction sectors have been hurting the demand for the
metal in India. This in turn put downward pressure on domestic aluminium prices.
Concerns over revised warehousing rules by LME, strengthening dollar, scaling back
of quantitative easing programme and weak demand have been impacting
aluminium prices in the international market for quite some time now. The price of
aluminium on the London Metal Exchange (LME) skid 0.7 per cent in December
2013 and 8.8 per cent since April 2013.

The LME unveiled new warehousing plans in November 2013, designed to speed the
delivery of metal out of its global warehousing network. According to the new plan,
the warehouses registered with the exchange will be required to ship more metal
out than they take in if waiting time for deliveries exceed 50 days. Investors turned
cautious given plans afoot that could result in a flood of excess aluminium from
over-stocked warehouses, adding to the already surging global supplies. Aluminium
inventory at the LME warehouses stood near its all-time high of 5,458 thousand
tonnes at the end of December 2013. Moreover, the increase in supplies will be in
the backdrop of a slow recovery in demand from advanced economies.

A strengthening US dollar also put pressure on prices. A strong US dollar makes

metals priced in dollar costlier for buyers of other currencies, thus decreasing
demand for metal as an alternative investment. Besides, concerns over Federal
Reserves scaling back of quantitative easing programme is affecting commodity
prices. The quantitative easing programme was believed to have helped generate
speculative increases in commodity prices in the past few years.

Aluminium & aluminium products industrys profits soar in September 2013 quarter

Lower raw material and power & fuel expenses aid this growth

The aluminium & aluminium products industry registered an over two-fold rise in
operating profits in the September 2013 quarter as compared to the corresponding
quarter a year ago. Net profits increased three-fold during the same period. The
strong growth in profits was on the back of savings on power & fuel costs and fall in
raw material expenses.

The industrys sales grew by 6.9 per cent in the September 2013 quarter as
compared to the corresponding quarter a year ago. This was mainly on account of
higher sales by Nalco. The company, which accounts for more than 50 per cent of
the industrys total sales, recorded a healthy 8.1 per cent growth in its sales during
the quarter.

Nalcos revenues from aluminium segment declined 22 per cent y-o-y due to lower
aluminium production in the September 2013 quarter. The companys aluminium
production declined 26.5 per cent to 75 thousand tonnes due to the managements
focus to decrease consumption of imported coal. The impact of lower aluminium
production was offset by strong alumina production growth of 20.1 per cent to 478
thousand tonnes. Sales of alumina increased by a whopping 96.8 per cent to 374
thousand tonnes. Increased alumina sales were due to lower internal consumption
for converting it into aluminium metal. Consequently, the companys revenue from
chemicals segment increased by 49 per cent. Revenue from power segment
decreased 18.6 per cent as the company avoided use of imported coal.

Lower use of imported coal and increase in supply of linkage coal helped Nalco
register a 31.9 per cent fall in its power & fuel costs in the September 2013 quarter.

A sharp decline in Nalcos power & fuel expenses led to a 31.8 per cent fall in the
industrys power & fuel costs. Subsequently, the industrys power & fuel costs as a
per cent of sales declined from 22.5 per cent in the September 2012 quarter to 17.3
per cent in the September 2013 quarter.

Raw material expenses, the industrys largest cost component, fell by 2.2 per cent
during the quarter. This was mainly on account of a 10.7 per cent fall in raw
material expenses of Nalco. Raw material expenses of downstream companies grew,
albeit by a marginal 1.6 per cent. Downstream companies buy ingots to
manufacture aluminium products which accounts for their major expenses. Ingot
prices in the domestic market remained under pressure during the quarter on
account of a weakness in the international prices.

Owing to lower power & fuel costs and raw material expenses, the industrys
operating margin more than doubled from 5.4 per cent in the September 2012
quarter to 12.4 per cent in the September 2013 quarter.

A 1.3 per cent fall in interest expenses and a slower 3.6 per cent rise in depreciation
charges, helped the industry witness a jump in profits at the net level. The
industrys net margin expanded from 1.7 per cent in the September 2012 quarter to
6.4 per cent in the September 2013 quarter.

Primary aluminium production falls by 12.5% in October 2013

Seventh consecutive month of fall in production

As per the data released by Ministry of Mines, the domestic primary aluminium
output fell by a steep 12.5 per cent to 126.3 thousand tonnes in October 2013 as
compared to a year ago month. This was the seventh consecutive month of a fall in
the industrys output. Sesa Sterlite and Balcos primary aluminium output remained
almost flat at the year ago level. However, a 26.3 per cent and 21 per cent fall in
Hindalco and Nalcos output dragged down the industrys overall output.

During April-October 2013, the domestic primary aluminium production fell by a

sharp 11.1 per cent to 882.2 thousand tonnes. This was mainly on account of a 23.4
per cent fall in Hindalco Industries output. The company produced 233.2 thousand
tonnes of primary aluminium during April-October 2013 as compared to 304.2
thousand tonnes produced in the year ago period. Moreover, Nalcos production fell
by 22.2 per cent to 185.4 thousand tonnes. Sesa Sterlites primary aluminium
output at 316.5 thousand tonnes remained close to that produced in the
corresponding period a year ago . Balcos output too remained flat at around 147
thousand tonnes during the same period
Domestic primary aluminium
production to fall by 4% in 2013-14
Capacity additions to aid production growth in 2014-
15
Indias primary aluminium production fell by a sharp 10.8 per cent to 633.4 thousand
tonnes during April-August 2013, as per the data released by Ministry of Mines. This was
mainly on account of a fall in primary aluminium production of Hindalco Industries and
Nalco. Hindalco Industries output fell by 23.2 per cent to 167.7 thousand tonnes during
the period while that of Nalco declined by 21.9 per cent to 135.1 thousand tonnes.

Aluminium & aluminium

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