BackAluminium firms look to secure new markets as capacity rises
Sesa Sterlite, Hindalco are working with government agencies and companies to find new uses for aluminium
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Mumbai: India’s aluminium capacity will rise to about 4.36 million tonnes (mt) by the end of this fiscal year from 1.71 mt in 2012 but with local demand at less than half of that, large firms that expanded aggressively—like Sesa Sterlite Ltd and Hindalco Industries Ltd—are stepping up marketing and research and development (R&D) efforts to secure new markets.
Hindalco, the flagship firm of the Aditya Birla Group, and Sesa Sterlite, Vedanta Resources Plc’s Indian unit, are working with government agencies and companies to find new uses for aluminium in the transport, rural, defence and aerospace sectors, as they ramp up production amid weak growth in domestic demand.
Sesa Sterlite’s aluminium capacity now stands at 2.6mt, from 745,000 tonnes two years ago, while Hindalco’s capacity is set to be 1.3mt, compared to 513,500 tonnes two years ago, according to data from the companies and the mines ministry.
Both have invested heavily in building capacity. For Hindalco, investment in new projects—Mahan Aluminium smelter in Madhya Pradesh and Utkal Alumina Refinery and Aditya Aluminium smelter in Odisha—amounted to around $5 billion (about ₹ 30,260 crore) over the last five years.
Vedanta spent $8 billion (about ₹ 48,416 crore), according to a Bloomberg report dated 29 November, in an aluminium and alumina complex in Lanjigarh and Jharsuguda in Odisha.
Confirming efforts to find new applications for their product, Debu Bhattacharya, managing director of Hindalco, said more than 30 product and application development projects are currently at various stages of innovation and application development.
“With the increase in our downstream capacity and improved capability, we will have higher focus on product and application development and higher research and development spend in future," he said in response to an emailed questionnaire, adding that in fiscal 2014-15 the company will launch 10-12 new products.
Hindalco is working with oil public sector units, automotive firms, transport organizations and boat manufacturers for increasing use of aluminium and is working with government agencies that test the new products. A rural initiative to tap the rising demand for aluminium sheets from the countryside with its network of distributors has also been chalked out.
Competitor Sesa Sterlite has similar strategies.
“We are addressing the demand generation in India through a two-pronged strategy involving applications development and downstream development," said Puneet Jagatramka, head of marketing and commodity procurement for the aluminium sector at Sesa Sterlite.
The company is working on an “aluminium intensive" bus in collaboration with Association of State Road Transport Undertakings, a body representing all of India’s state transport agencies; light weighting of automotives by replacing steel with aluminium in collaboration with National Automotive Board of the department of heavy industries; and use of aluminium in rail coaches in collaboration with state-owned BEML Ltd.
Sesa Sterlite is also in discussions with Chhattisgarh State Industries Development Corp. Ltd for a proposed aluminium park in Korba in Chhattisgarh and also with state nodal agencies for aluminium cluster development to increase exports, besides investing in R&D for developing new alloys for electrical, aerospace/defence and auto sectors.
In contrast, the state-run National Aluminium Co. Ltd has kept its installed capacity for aluminium stable at 460,000 tonnes in the last two years and a senior executive in the company, on the condition of anonymity, said it has chosen not to expand until it gets sufficient power.
But can India consume to so much aluminium and in such forms? An expert said it can.
“Aluminium demand in future is likely to be led by China and India," said S. Vijay Kumar, distinguished fellow at The Energy and Resources Institute and a former secretary at the mines ministry. “Indian demand will come because of low per capita consumption —just 1.3 kg against 6.4 kg in Brazil and 12.4 kg in China."
A shift in use from electrical to packaging and transport is likely to spur the demand, Kumar added.
But traditional demand for aluminium has been muted over the past years due to low economic growth which has pushed down purchases of automobiles, consumer goods and new homes.
To be sure, aluminium producers sell a part of their products overseas where an oversupply of aluminium has just started to shrink and prices have shown some recovery. In fact, part of the reason for aggressive expansion was to capture the foreign markets where companies have relatively high cost of production. “Global capacities are moving from east to west—expensive capacities in North America and Europe are shutting down," Hindalco’s Bhattacharya said.
Two equity analysts said while the initiatives by the two companies to boost the demand will show results in the future, for now, bigger problems are looming.
“New product development and commercialization is a long way off—it is at least 5 years away," said Rahul Jain, vice-president-equity research at CIMB Securities (India) Pvt. Ltd, the local unit of a Malaysian bank and brokerage.
“The important thing is to get the whole production chain right and that means to focus on costs, ramp up of the plants to bring them to optimum capacity and improvement of logistics," Jain added.
Another analyst said the marketing initiatives were urgent moves to penetrate local and global markets as the fundamental problem of an aluminium oversupply still prevailed.
“All marketing efforts are good, but will have little impact on bottomline given lower volumes (of the new products)," said Ritesh Shah, materials analyst at Espirito Santo Securities India Pvt. Ltd.
“Further, we have our doubts if these product premiums will sustain in light of overcapacity in flat rolled products markets in Asian subcontinent," Shah added.
Aluminium premiums currently stand at record levels around $420-440 a tonne on top of London Metal Exchange (LME) prices, according to Shah.
LME aluminium was priced at $2,086.5 a tonne on Friday, up 16.74% from $1,787.25 a tone a year ago.
Shares of Hindalco on the BSE closed on Monday at ₹ 176.2, up 67.97% from a year ago while shares of Sesa Sterlite closed on Monday at ₹ 282.90, up 51.04% from a year ago.
The BSE metal index closed on Monday at 12,594.65 points, up 61.78% from a year ago.
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