India's aluminium companies to benefit from higher global demand

Indian companies like Hindalco and Nalco will benefit from the higher global demand for aluminium. It is expected that Indian companies, which had recently added capacities, will gain from the growing demand for aluminium. The demand for the metal is expected to grow by four to five per cent over the next two years, while there is shortage in the supply side. There will be a shortage of aluminium as there are no major new supply sources coming up in the near future, according to the analyst.

Indian companies will reap the benefit of this higher demand as domestic aluminium companies had added capacities in the recent past. Nalco and Hindalco are expected to see higher volume growth over the next two years. Moreover, product mix would improve as companies convert their base metal into value added products.

Apart from this, Indian companies are amongst the lowest cost producers. Since Indian companies have captive resources such as alumina and power, they are among the lowest cost aluminium producers in the world. This is the biggest competitive advantage in the commodities business. Also, it assumes significance as currently aluminium sector is witnessing shortage of resources in alumina and power - a case in point is China. The increase in product prices will lead to higher earnings for Nalco and Hindalco in FY06.

As a result of the deficit and a falling inventory, aluminium prices are likely to rise higher over the next two years. Analysts have revised upward aluminium price forecast for FY06 from $1,735 earlier to $1,800.

China, which now accounts for roughly 20 per cent of the total world demand, is expected to witness moderate growth rate. Price aluminium is set to increase owing to the higher cost of production due to rising alumina prices. A brownfield expansion (with capital cost of $2,850 per tonne) would generate 12 per cent RoCE (return on capital employed) only at $1,900 LME price. Therefore, additional aluminium supply would only come at a higher price level, which is still far away.