Aluminium producers are expected to face challenging times ahead as prices for the products have been subdued in FY-2024 and are expected to remain under pressure in the near future. The demand for aluminium has also remained sluggish even as cost support is fading. So far, the global aluminium demand during the Q2 (second quarter) of the calendar year (CY) 2023 failed to deliver on recovery expectations, as building, construction and packaging demand remained weak.
As per a recent report by Kotak Institutional Equities, thermal coal prices have corrected 25 per cent in the past two months, raising the aluminium spreads to 40 per cent above the mean. Falling international thermal coal prices are an added negative for Indian aluminium producers, as their relative cost advantage over global peers narrows down.
As per the report, Indian aluminium producers enjoy a cost advantage due to cheap domestic coal compared with global peers that use Australian and South African thermal coal or natural gas.
According to a report by CRISIL, India’s aluminium exports to the European Union (EU) are set to become unviable once the 27-nation bloc implements the Cross-Border Adjustment Mechanism (CBAM) to help reduce its carbon emissions and eventually attain Net-Zero carbon emissions by 2050. Under CBAM, the transition phase is expected to start in October and would be applicable to iron and steel, cement, aluminium, fertilisers, and electricity to start with. Importers in the EU must declare the embedded carbon emissions in goods on a quarterly basis. Initially, a 100 per cent free allowance will be applicable. However, starting 2026, the free allowance will be gradually phased out, and completely removed by 2034. From then on, everything above the allowance will be taxed based on Emissions Trading System (ETS) weekly prices.
As per the CRISIL report that bodes ill for Indian aluminium manufacturers, India produces 4.1 million tonne (MT) of primary aluminium annually — amounting to 6 per cent of global production — of which as much as 56 per cent, or 2.3 MT, is exported. It is one of the lowest-cost producers of aluminium globally owing to integrated operations and low costs of power generation since it uses coal-based captive plants. The EU is not only India’s second-largest trading partner, but also an attractive destination for aluminium exports. Indeed, in fiscal 2023, primary aluminium accounted for as much as 29 per cent of the total $74.8 billion of merchandise exports from India to the EU.
As per the CRISIL report, primary aluminium production is one of the most energy-intensive processes in the metals and mining industry. Worldwide, manufacturers require 13,500–14,500 kWh of energy to produce 1 tonne of primary aluminium. The resulting carbon emissions are a direct coefficient of the energy source utilised for the process. The higher the emissions from an energy source, the higher the environmental impact.
Globally, China is the largest aluminium producer with a 59 per cent production share. It has one of the highest greenhouse gas (GHG) intensities, of 17-18 tonne CO2 per tonne of aluminium (tCO2/t Al), since over 80 per cent of the power requirement is met through coal-based power plants. In comparison, Europe has one of the lowest GHG intensities, since 93 per cent of the requirement is met through hydropower.
However, India produces aluminium using coal-based captive plants, thus sitting at the opposite end of the spectrum when it comes to emissions. As the average GHG emission intensity of the domestic aluminium industry is one of the highest globally, India will be hit hard by CBAM as it has one of the highest emission intensities among major exporters. Indian manufacturers are currently competing with those in the Middle East, Canada, Norway, and Iceland, which have significantly lower emissions. With Middle Eastern countries also expanding their capacities, competitors in the region are expected to be in a better position after the CBAM implementation. Domestic manufacturers such as Vedanta, Hindalco and NALCO have announced initiatives to reduce GHG emissions.
While Vedanta has stated it will lower absolute emissions by 25 per cent by 2030, compared with fiscal 2021, Hindalco has set a target to reduce specific GHG emissions by 25 per cent by 2025 against fiscal 2012 levels. NALCO has allied its target with India’s aim of reducing GHG emissions, increasing the share of non-fossil power sources to 40 per cent by 2030.
As per the CRISIL report, despite taking active measurements to reduce emissions, domestic manufacturers are unlikely to bridge the steep emission intensity gap significantly owing to coal-based power generation. The European market will be unviable despite domestic players lowering emissions intensity by 20–25 per cent by fiscal 2030. No new capacity additions are taking place in Europe; hence, it will remain import-dependent, driving prices higher. Indian primary aluminium producers are expected to divert their produce to other developing economies such as southeast Asia, Africa and even China to try and bridge this revenue shortfall.