Research Paper

On
“Indian Primary Aluminium Market”

Table of content

1. Introduction on Aluminium
2. Research Overview
3. Global Aluminium Industry
1. Global Production
2. Global Consumption
3. Top Global Companies in Primary Aluminium
4. Indian Aluminium Industry
 1. History
2. Features of Indian Aluminium Industry
3. Primary Aluminium Production
4. Consumption
5. Analysis of Indian Primary Aluminium Market
1. Type of Market
2. Profile of Key Players
3. Reasons of Indian Aluminium Industry being an Oligopoly
4. Porters Competitive Framework
6. Pricing of Primary Aluminium
7. Conclusion
1. Challenges Ahead
2. Outlook
8. References

Introduction
Global society faces a great challenge to shift human economic activity and lifestyles
on to a sustainable path in the 21st century, including meeting threats from climate change.
The story of the aluminium industry over the decades ahead must be one of how it is part of
the solution for a sustainable future. The metal aluminium has a vital role to play in
successfully addressing this sustainability challenge.
Aluminium is the third most abundant element in the earth's crust and constitutes 7.3%
by mass. The existence of was first established in 1808 but there were a few historical
mentions of aluminium use. The aluminium metal was extracted from the ore after many
years of research. It was possible only in the year 1854 to develop a viable commercial
production process of aluminium. Primary aluminium is the hot molten metal that is produced
in the smelter. Secondary aluminium is the finished goods made from primary aluminium.
Aluminium is a young material, and in the little more than a century since its first
commercial production, it has become the world’s second most used metal after steel. The
demand for aluminium products is increasing year by year, so why is aluminium a metal in
such demand and what is its role in the lives of future generations?
Why Aluminium?

Modern life is full of advantages brought about by the use of aluminium. Some of the
major benefits of this unique metal are:
Strength
Pure aluminium is soft enough to carve but mixed with small amounts of other metal to
form alloys, it can provide the strength of steel, with only one-third of the weight.
Durability
Aluminium sprayed on a polymer forms a thin insulating sheet.
Flexibility
Its combination of properties ensure aluminium and its alloys can be easily shaped by
any of the main industrial metalworking processes - rolling, extrusion, forging and casting.
Impermeability
Aluminium has excellent barrier function which makes it ideal for food and drink
packaging and containers. It keeps out air, light and microorganisms while preserving the
contents inside.
Lightweight
Aluminium used in transport reducing the weight of the vehicles, hence in providing fuel
efficiency, reducing energy consumption and greenhouse gas emissions.
Corrosion-resistant
The metal's natural coating of aluminium oxide provides a highly effective barrier to the
ravages of air, temperature, moisture and chemical attack, making aluminium a useful
construction material.
Recyclable
Once made, aluminium can be recycled again and again, using only a very small
fraction of the energy required to make "new" metal. Recycling saves about 95% of the
energy required for primary production.
Other
Aluminium is a superb conductor of electricity which has seen it replace copper in many
electrical applications. It is also non-magnetic and non-combustible, properties invaluable in
advanced industries such as electronics or in offshore structures.

Research Overview
Aluminium is the second most important metal after steel. The Indian economy is
growing at a consistent rate of about 8% and due to this there is an increase in the domestic
demand for the metal which is most widely used in various sectors for various purposes.
The interesting part about the topic “Indian Primary Aluminium Market” is that even
though there is a huge growth in demand for the metal both in domestic market as well as in
the international market which is mainly driven by China. The production of primary
aluminium in India is dominated by the old players; there has been no new entrant into the
market including the major metal industries like ArcelorMittal etc. This makes the research
interesting.
The objective of the research is
1. To study the global as well as domestic production and consumption patterns.
2. To study the type of Indian Primary aluminium markets and its key players.
3. To study the reasons for the primary aluminium market being an Oligopolistic market
and the barrier to entry.
Global Aluminium Industry
Global Production
Global production of primary aluminium rose from 32 million tons (MT) in 2005 to
34 MT in 2006, a jump of 6%. In 2007, it further increased to 38 MT, an increase of 12%
YoY. China alone accounted for 29% of global primary aluminium production.
Primary aluminium production is concentrated in relatively few countries. China
alone produced 26 percent of the world total in 2006.The top five producers—China, Russia,
Canada, the United States, and Australia—accounted for 59 percent of world output that year.
Production is found where energy is cheap because making aluminium uses large quantities
of electricity. The world’s largest aluminium smelter, now being planned for construction in
Dubai, will have its own 2,600-megawatt power plant.
Aluminium Producing Countries
The ore of the metal i.e. bauxite generally occurs in the tropical and sub tropical areas
of earth and is present in almost all continents except Antarctica with the estimated deposits
of 65 billion tons. The major producers of primary aluminium in the world are
• United States of America
• Russia
• Canada
• European Union
• China
• Australia
• Brazil
• Norway
• South Africa
• Venezuela
• Bahrain
• United Arab Emirates
• India
• New Zealand
The global production of aluminium figures around 38 million tons and the above-mentioned
countries share more than 90% of the aluminium production. China and India reported the
greatest increases in aluminium output, at 12 percent and 11 percent respectively.
 (The above chart shows the Global Aluminium Production from 1997-2007)

Country 2001 2002 2003 2004 2005 2006

China 3371 4321 5547 6689 7806 9349

Russia 3302 3348 3478 3594 3647 3718
Canada 2583 2709 2792 2592 2894 3051
USA 2637 2705 2705 2517 2480 2281
Australia 1797 1836 1857 1895 1903 1932
Brazil 1132 1318 1381 1457 1498 1604
Norway 1068 1096 1192 1322 1377 1427
India 624 671 799 861 942 1105
S. Africa 654 704 733 864 851 887
Bahrain 522 517 526 524 708 844
Source: ABARE
(The above chart shows the country wise data of Aluminium Production)

Global Consumption
Asia showed the largest annual increase in consumption of primary aluminium, driven
largely by increased industrial consumption in China, which has emerged as the largest
aluminium consuming nation, accounting for 30% of global primary aluminium consumption
in 2007. As far as global consumption is concerned, it increased by 8.2% in 2006 and touched
34.7 MT. In 2007, the corresponding figures were 10% and 37.8 MT respectively.
Globally, newer packaging applications and increased usage in automobiles is
expected to keep the demand growth for aluminium over 5% in the long-term. Asia will
continue to be the high consumption growth area led by China, which is expected to continue
to register double-digit growth rates in aluminium consumption in the medium-term.
The following are the various applications areas of Aluminium.
1. Transportation
2. Construction
3. Packaging
4. Electrical
5. Engineering
6. Consumer Durables

(The sector wise global consumption pattern of Aluminium)

We observe from the above graph that 29% of all Aluminium is consumed by the
transportation sector. This is because of the boom in the aviation and automobile industry. As
Aluminium is a complementary to steel, the consumption for aluminium has substantially
increased.

Aluminium is the second most consumed metal on the earth, and is consumed and
produced more than all non-ferrous metals combined together. By 2030, it is expected that
primary aluminium consumption will cross more than 70,000 kilo tonnes (KT). At the
beginning of this century, consumption was at 25,059 KT and since then it has grown steadily
mainly on demand from Asia and in particular China. The total global consumption of
aluminium stood at 33,970 KT in 2006 and has reached 37,800 KT in 2008. The overall
demand saw a drop only in the 2001 when consumption was at 23,722 KT.

World's Top Ten Primary Aluminium Consuming Countries (in KT),

2001-06
Country 2001 2002 2003 2004 2005 2006
 China 3492 4115 5178 6043 7119 8648
USA 5230 5509 5667 5800 6114 6150
Japan 2014 2010 2235 2319 2276 2323
Germany 1580 1690 1916 1795 1759 1823
S. Korea 850 921 982 1118 1201 1153
India 589 604 798 861 958 1080
Russia 786 990 803 1020 1020 1047
Italy 756 851 956 987 977 1021
Canada 743 747 736 755 801 846
Brazil 553 578 589 651 759 773
Source: ABARE

The country-wise pattern of primary aluminium consumption shows China's position

as pre-eminent consumer. China is followed by the US, Japan, Germany, South Korea, India,
Russia and Italy. The presence of four Asian countries viz, China, Japan, South Korea and
India, clearly explains why Asia leads in the global consumption of primary aluminium. All
these four Asian giants have become hubs for the global automobile industry, which
consumes a major portion of primary aluminium.

Top Global Companies in Primary Aluminium

The top global companies in Primary Aluminium are
1. ALCOA
2. RUSAL
3. ALCAN
4. HYDRO
5. BHP Billiton
6. CHALCO
7. DUBALCO

Indian Aluminium Industry

The Indian aluminium sector is characterised by large integrated players like Hindalco
and National Aluminium Company (Nalco). The other producers of primary aluminium
include Indian Aluminium (Indal), now merged with Hindalco, Bharat Aluminium (Balco)
and Madras Aluminium (Malco) the erstwhile PSUs, which have been acquired by Sterlite
Industries. Consequently, there are only three main primary metal producers in the sector
namely Balco (Vedanta), National Aluminium Company (Nalco) and Hindalco (Aditya Birla
Group).
History
Aluminium production in India commenced in 1938 with the commissioning of
Aluminium Corporation of India's (Indal) plant in technical and financial collaboration with
Alcan, Canada having a capacity of 2,500 ton per annum. The plant started with sheet
production using imported aluminium ingots.
 In 1959, Hindustan Aluminium Corporation (Hindalco) was set up at Renukoot in UP
with an initial capacity of 20,000 ton per annum. Malco, a public sector undertaking was
commissioned in 1965 with a capacity of 10,000 ton per annum. This was followed in 1975
by Balco, a PSU with a similar capacity of 10,000 ton. Finally in 1987, National Aluminium
Company (Nalco) with a capacity of 0.218mn ton was commissioned in technical
collaboration with Pechinery of France.
In the 1970s, the government regulated and controlled the aluminium industry through
price distribution controls and barriers to entry. The 1970 Aluminium Control Order
compelled the Indian companies to sell 50 % of the aluminium produced for electrical
purposes.
The government decontrolled the industry in 1989 with the removal of the Aluminium
Control Order. The industry was de-licensed in 1991 and was allowed liberal import of
capital goods and technologies.
The demand for aluminium grew 6 % in the 1980. Aluminium demand post
liberalization registered a growth rate of 12%. This coupled with the increase in the global
aluminium prices ($1800/ ton in 1994) led to increased investments in this sector.
The downstream capacity in the aluminium industry spurted due to sufficient duty
differential between aluminium ingots or primary metal and value added downstream
products. In March 1993 while the duty on aluminium ingots was 25% the duty on
downstream products was 70%. However with the change in the tariff structure undertaken in
the 1997 budget, duty on semi-fabricated metal was lowered to 25%. This change adversely
affected the fortunes of the downstream producers.
Features of Indian Aluminium Industry

• Highly concentrated industry with only five primary plants in the country.
• Controlled by two private groups and one public sector unit.
• Bayer-Hall-Heroult technology used by all producers.
• Electricity, coal and furnace oil are primary energy inputs.
• All plants have their own captive power units for cheaper and un-interrupted power
supply.
• Energy cost is 40% of manufacturing cost for metal and 30% for rolled products.
• Plants have set internal target of 1 – 2% reduction in specific energy consumption in
the next 5 – 8 years.
• Energy management is a critical focus in all the plants.
• Two plants have declared formal energy policy.
• Each plant has an Energy Management Cell.

Primary Aluminium Production

India is considered to be the fifth largest producer of Aluminium in the world. It
accounts to around 5% of the total deposits and produces about 0.8 million tons of
aluminium. It is estimated that if the country’s aluminium consumption rate maintains, it’d be
having the reserves for over 350 years. India has confirmed 3 billion tonnes of Bauxite
reserves out of the global reserve of 65 billion tonnes. The worldwide alumina production
competence is around 58 million tonnes in which India has 2.7 million tonnes. Most of the
bauxite mines lie in Bihar, Karnataka and Orissa.
In India, the production of aluminium is highly concentrated and is in the hands of the
following three companies
 • Bharat Aluminium Co. Ltd (BALCO)
• National Aluminium Co. Ltd (NALCO)
• Hindustan Aluminium Co. Ltd (HINDALCO)
India is the eighth leading producer of primary aluminium in the world. The Ministry
of Mines, Government of India puts the production target for the year 2007-08 at 1,237 KT,
an increase of 84 KT from previous year's 1,153 KT. The production of aluminium in India
has grown substantially in last five years. Production got a boost due to adding of extra
smelting capacity in recent years and rising domestic demand emanating from packaging,
construction, automobiles and electrical sectors. India's contribution in global aluminium
production is less than 5 per cent despite having 7.5 per cent of the world's total bauxite
deposits and 7 per cent of bauxite production.

Consumption
The consumption of primary aluminium has risen sharply since 2002 and reached
1,080 KT by 2006. From the end of the 1990s till 2002, the consumption remained almost
stagnant, around 500- 600 KT. The reason for this growth after 2002 lies in the demand
generated from automobile, construction and packaging sectors.
The per capita consumption of aluminium in India continues to remain abysmally low
at under 1 kg as against nearly 25 to 30 kgs in the US and Europe, 15 kgs in Japan, 10 kgs in
Taiwan and 3 kgs in China. The key consumer industries in India are power, transportation,
consumer durables, packaging and construction. Of this, power is the biggest consumer
(about 44% of total) followed by infrastructure (17%) and transportation (about 10% to 12%).
However, internationally, the pattern of consumption is in favour of transportation, primarily
due to large-scale aluminium consumption by the aviation space.
 (The sector wise Indian consumption pattern of Aluminium)

(The above chart shows the consumption of Primary Aluminium in India)

Analysis of Indian Primary Aluminium Market

Type of Market
The primary Aluminium production market in India is an oligopolistic market. The
primary aluminium is a homogenous product. As the product is homogenous we can term the
market as Pure Oligopoly. Though there are some grades in aluminium based on aluminium
concentration like EC (Electrical conductivity) Grade, etc but there are very less difference in
the quality of the product. There is little or no gap between the demand and supply as the
supply just matches the demand. Moreover there is a huge demand from countries like china
hence there is not constraint on the number of consumers.
There are only 3 players in the aluminium market in India with total production of
1250 KT in 2008. The entry into market is possible but not easy due to the heavy initial
capital that is required to setup the plant. As aluminium is a homogenous product there is no
price war between the three players and these firms are price takers. Though the company
sells the product at price which is decided by them, the firms mostly go by the price on the
London Metal Exchange (LME). In the Indian aluminium industry all the firms are price
takers and there is no clear leader as all the 3 firms have almost equal market share. The price
is decided by demand and supply in the commodity market.
Profile of Key Players
Capacity Market
(Ktpa) Share
HINDALCO 471 39%
Sterlite
385 32%
Industries
NALCO 345 29%
 (Note: We have taken the production capacity to calculate the market share as each firm are producing and
selling to the fullest of their capacity)
The Herfindahl Index (H) for Indian Primary Aluminium Industry is 3386.
This shows that the Indian Primary aluminium market is evenly distributed among the three
players.
National Aluminium Company (NALCO)
NALCO is one of the largest integrated aluminium producers in Asia. The
Government of India (GoI) holds 87.15 per cent stake in the company. The company has an
alumina refinery at Damanjodi and a smelter at Angul in Orissa. Currently, NALCO has
undertaken a capex programme of Rs.41 billion to increase aluminium production capacity to
460,000 tonnes from 345,000 tonnes, and also to enhance the capacity of its mining, refining
and power generation operations.
Hindustan Aluminium Company (HINDALCO)
Hindalco Industries Limited, a flagship company of the Aditya Birla Group, is
structured into two strategic businesses aluminium and copper with annual revenue of US
$14 billion and a market capitalization in excess of US $ 23 billion.
Established in 1958, Hindalco commissioned its aluminium facility at Renukoot in
eastern U.P. in 1962 and has today grown to become the country's largest integrated
aluminium producer and ranks among the top quartile of low cost producers in the world. The
aluminium division's product range includes alumina chemicals, primary aluminium ingots,
billets, wire rods, rolled products, extrusions, foils and alloy wheels. It enjoys a domestic
market share of 42 per cent in primary aluminium, 63 per cent in rolled products, 20 per cent
in extrusions, 44 per cent in foils and 31 per cent in wheels.
Hindalco has launched several brands in recent years, namely Aura for alloy wheels,
Freshwrapp for kitchen foil and ever last for roofing sheets. Hindalco Industries Ltd. has been
able to grow revenues from 121.2B to 193.2B. Most impressively, the company has been able
to reduce the percentage of sales devoted to selling, general and administrative costs from
4.15% to 2.96%. This was a driver that led to a bottom line growth from 15.8B to 26.9B.
The company is also believed to be keen on kick-starting its green field Aditya
Aluminium Project which envisages an alumina refinery and aluminium smelter at an
estimated cost of $1.8bn. The project includes a 1m tonne alumina refinery, a 2.5 lakh tonne
aluminium smelter and a 660 MW captive power plant.
Sterlite Industries Ltd (Vedanta)
Sterlite Industries’ Aluminium business comprises of two operating companies,
BALCO and MALCO. BALCO is a partially integrated aluminium producer with two
bauxite mines, one refinery, two smelters, a fabrication facility and two captive power plants
at Korba in central India. MALCO is a fully integrated producer with two bauxite mines, a
captive power plant and refining, smelting and fabrication facilities at Mettur in southern
India. The primary products are aluminium ingots, rods and rolled products.
The smelters at BALCO and MALCO produced 380,000 tonnes in FY 2007, marginally
higher than the rated capacity. The parent company Vedanta is coming up with a 5 lakh ton
smelter in Jharsuda, Orissa. The project is in advance state and is expected to be operational
by the year 2009.
Reasons for Indian Aluminium Industry being an Oligopoly (Barriers to Entry)
The reasons for the aluminium industry to be an oligopoly is
• Economies of Scale.
The major input in producing primary aluminium is alumina and power which
constitute about70% of the cost in producing. Although the requirement of alumina does not
vary much with the size of the plant but the consumption of power varies drastically. Hence
with higher production capacity the cost of production goes down. For a new player
producing aluminium and low cost will be very difficult.

• Huge capital investments.

The capital required to setup an aluminium production plant is huge. E.g.: BALCO
spent about $1 billion to set up a 2.45 lakh ton capacity with 540MW power plant.

• Time to setup.
It requires around 3 years to setup a plant of the size mentioned in the above example.
The new player would require about 3 years to start manufacture primary aluminium and the
market demand supply equation can change by the time the firm starts manufacturing.
• Control over the Bauxite mines.
As the raw material for manufacturing aluminium is bauxite the existing players have
control over the bauxite mines in India and it would be difficult for a new player to get new
bauxite mines.
• Scarcity of power.
About 30-40% of the cost of producing is power. As producing primary Aluminium
requires a large amount of electricity they need to have captive power plants. Setting up of
captive power plants requires huge capital investment and also requires a lot of time. The
basic raw material to generate power is coal. Hence the firms also would need to have coal
mines. Most of the coal blocks are owned by independent power producers and hence the
coal blocks are scarce.

• Government Factor.
The other major hurdles are getting environmental clearance from the government.
The other factor would be in getting bauxite mines allotted to the firm. Hence in these two
cases the government acts as a barrier.

• Land.
Existing players can expand as setting up a new brown field project is easy than
getting land allocated for a new green field project considering the political situations in
India.

• Geographical factors.
The bauxite ore is abundant only in the states like Orissa and hence the firms entering
into the market need to setup the plant in these states.

Porters Competitive Framework

It represents the strategic challenges facing firm managers as they seek to maximise
profit in oligopolistic markets. Porter’s five structural determinants of the intensity of
competition and of the profitability of the firms in oligopolistic industry (Indian Primary
Aluminium Industry) are

1. Threat from substitute product.

Copper can replace aluminum in electrical applications; magnesium, titanium, and
steel can substitute for aluminum in structural and ground transportation uses. Composites,
wood, and steel can substitute for aluminum in construction. Glass, plastics, paper, and steel
can substitute for aluminum in packaging.

2. Threat of Entry.
Though there are lot of barriers to enter into the aluminium market, other major metal
players who are not into Aluminium business can enter seeing the rate of growth of the
aluminium market.

3. Bargaining power of buyers.

Even though there are few players in the primary aluminium industry the price is
determined by the demand and supply and the buyer has an upper hand and the bargaining
power of the buyer is significant.

4. Bargaining power of suppliers.

India is a net exporter of Alumina and the players manufacture the alumina for their
own consumption. Hence this is not significant. As far as bauxite is concerned the firms have
their own mines but all the firms do not have their own coal mines and depend of Coal India
to supply coal to the firms.

5. Intensity of rivalry among existing competitors.

All the three players have almost equal market share in India. Looking at the global
demand growth driven by china the players are eyeing the growing global market and hence
increasing the production capacity.

Pricing of Primary Aluminium

The major trading centers of aluminium in the world are
• London Metal Exchange (LME)
• Tokyo Commodity Exchange (TOCOM)
• Shanghai Futures Exchange (SHFE)
• New York Mercantile Exchange (NYMEX)
These above mentioned commodity exchanges provide direction to the world
aluminium prices. In India, aluminium is also traded at various commodity exchanges namely
Multi Commodity Exchange of India and National Multi Commodity Exchange of India.
Aluminium traded at around US$2,000 per tonne in the beginning of 1980 and since
then witnessed a declining trend till 1986. The price plummeted to as low of US$919 per
tonne in June 1982. The prices hovered around US$1,200-1,400 per tonne between 1982 till
the middle of 1987. The prices breached 2000 US$ per metric tonne barrier in January 1988
and in the month of June reached an all time record-high of US$3,578 per tonne mainly on
account of supply constraints in the world market. The late 1980s and early 1990s again saw
a slump in prices due to collapse of USSR and resulting flood of aluminium into the world
markets by the CIS countries, followed by an upswing in prices mid-decade and a declining
trend again at the end of the decade. Post 2000, prices have stayed at US$1,200-1,400 per
tonne level. In the past three years, the prices have shown an uptrend and have traded above
US$2,000 per tonne.
The other factors for the variation in the price of aluminium in the past two years are
price of crude oil which increased from $70 per barrel to over $100 a barrel and fluctuation of
INR. The rising crude prices resulted in higher prices for its derivatives. The soaring crude
also had a cascading effect in terms of higher transportation costs and higher prices of
alternate energy sources like coal. All these led to a significant cost push for the aluminium
industry. The depreciating dollar resulted in a sharp fall in domestic aluminium realizations as
the prices are dollar denominated. Continuing with the stated policy of import duty reduction,
the government cut the customs duty on aluminium. The effective import duty for aluminium
declined from 8.1% to 5.7%. As a result of these macro economic factors, average aluminium
realisations for FY08 declined sharply by11% as compared with FY07 realisations.

Conclusion
Challenges Ahead

1. A long-term decline in the real price of Aluminium will erode margins of the firms
manufacturing primary aluminium.
2. Pressures to improve return on investment.
3. Maturing of terminal markets such as the London Metals Exchange (LME) as the firms
are price takers and have little scope to decide the price.
4. Technological changes — particularly on the upstream side. There has been no alternate
method developed to extract metal from the ore.
5. Intense competition from other materials such as steel and plastics which are the
substitutes to aluminium.
6. Need to respond to the changing demands of global customers, such as automakers and
can manufacturers.
7. Reduce the consumption of electricity consumed in producing aluminium i.e. increase the
energy efficiency.
8. Reducing the greenhouse gas emissions and PFC from the production process.

Outlook

The world aluminium market is expected to have a surplus of about 500 KT in the
year 2008 due to the rapid increase in production activities and slightly lesser pace of growth
in aluminium demand. The world aluminium production is expected to reach 40,400 KT
against the expected demand of 39,900 KT in 2008 thus likely to affect the aluminium prices
in the short run. The high energy prices are a major concern and may provide some support to
prices in between or may also result in slight reduction in the anticipated surplus. In the long
term, increasing demand from Asia might benefit aluminium price. Increasing income levels
in India, for instance, are inducing higher demand from the automobiles and construction
sectors, thus promising a better future for aluminium in the domestic market.

References
1. www.commoditywatch.com
2. www.metalworld.co.in
3. www.equitymaster.com
4. www.crnindia.com
5. www.nalco.com
6. www.hindalco.com
7. www.vedantaresources.com
8. www.indiainfoline.com
9. London Metal Exchange Website
10. International aluminium Institute website.
11. Annual Reports of HINDALCO, NALCO and Vedanta (Sterlite Industries).