Domestic aluminium makers in the country are expected to forge a decade-high profitability, thanks to a robust demand outlook and limited global capacity additions and efficient cost structures. It is expected that the operating margins of the domestic aluminium makers are set to touch a decadal high of around 30 per cent in the current financial year, says a CRISIL report.
The report said global aluminium demand was expected to rise by 6-7 per cent this year, helped by the low base of 2020, when output had contracted 2 per cent following the Covid-19 pandemic.
The CRISIL report points out that the aluminium industry growth will also be driven by global economic recovery and increased spending on construction, infrastructure and electrification. With governments stepping up on green initiatives and sales of electric vehicles increasing, annual global aluminium demand will rise 3 per cent over calendar years from 2021-2025. However, global capacity addition is expected to trail at 1 per cent through 2025 on environmental concerns and emphasis on reducing emissions. It is also expected that limited capacity addition, amid the demand pull, will improve utilisation rates of aluminium smelters globally to 85 per cent this year from 80 per cent in 2020, and support healthy aluminium prices.
The report observes that domestic demand for aluminium is expected to grow by 10-12 per cent this fiscal after contracting 13-14 per cent during the last fiscal. Growth is expected to be propelled by higher demand from the construction, automotive and power sectors. As per the report, improved demand outlook and healthy realisations is expected to benefit domestic aluminium companies, which are interestingly among the lowest cost producers in the world.
“Over the past three fiscal years, cost-competitiveness has resulted in Indian aluminium exports increasing to more than 50 per cent of annual production. There was a notable step-up last fiscal to offset declining domestic demand, which supported healthy utilisation rates. Overall, low cost of production and higher realisations will lift operating margins by 500 basis points this fiscal from 25 per cent seen last fiscal," the report notes.
"With a strong profitability outlook resulting in an annual operating profit of Rs 20,000 crore, and current operating rates close to 95 per cent, domestic producers will see increased capital expenditure intensity over the next 2-3 years,” said Manish Gupta, Senior Director, CRISIL Ratings.
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Experts at CRISIL state that domestic aluminium producers are looking to increase
the share of downstream capacities to more than 35 per cent from 20 per cent over the medium term. This will burnish realisations and strengthen business profiles. Experts point out that despite surplus aluminium production, India imports 30 per cent of its consumption, mainly finished products, whereas exports are mainly in the form of semi-finished products fetching lower realisation. CRISIL experts also point out that additionally, downstream capital expenditure will lead to higher, and more stable, profitability for aluminium producers that will also drive improvement in credit metrics. Experts say that a sharper than expected correction in global aluminium prices, weaker global demand, or lower-than expected supply tightness would be main factors to watch out for the aluminium players.
