On the back of Chinese demand, the price of the metal has swung back from the lows it saw earlier this year
China, according to IMF, will be the only exception among developed economies and emerging markets, recording a GDP growth of 1.9% in 2020 and then 8.2% next year.
By Kunal Bose
The world aluminium industry, in which India has a growing profile, is experiencing a vertiginous roller-coaster ride on price since the beginning of the year. The average price of the metal at the London Metal Exchange (LME), in the first quarter of 2020, fell sharply to $1,690 a tonne, from $1,859 in the corresponding period of 2019. The retreat was attributable to the global use, during January-March, shrinking by a whopping 9.3%, to 13.9 million tonnes, year-on-year on the back of a 1.6% demand contraction (to 64.2 million tonnes) in 2019. The scene has now reversed, with the price recovering sharply from the April-low and climbing to a two-year high. The industry, having experienced low demand in 2019 and then receiving a battering for most of this year, needed the kind of price breakout seen recently. As switching on and off of aluminium smelters is a highly time-consuming and expensive process, the industry is left with no choice but to sustain production even in times of demand meltdown. That is why, in recent times of difficulty, global aluminium output has remained flattish.
The 2019 production was marginally down to 63.1m tonnes from 63.9m tonnes a year ago. A Hindalco presentation for investors says that in the nine months to September 2020, against world aluminium demand shrinking 8% (to 44.7m tonnes), production rose by just 1% (to 47.9m tonnes). That created a large global metal surplus, with a negative bearing on prices.
Like any other commodity, aluminium price should largely be a reflection of demand and supply. In this continuous-process industry, however, supply over a period of time will perforce remain more or less constant, unless new smelting capacity is commissioned or environment-unfriendly and high-cost smelters are taken offline. Demand that largely moves the needle at the LME and the Shanghai Futures Exchange (SFE) has been impacted this time, by global health concerns and some trade-related factors. The Covid-19 pandemic-spreading from China to other countries since January, infecting tens of millions and badly hurting global economic activity for months-has led aluminium-using sectors, ranging from construction and house-building to automotive and electrical, to reduce metal purchase.
No wonder, the Covid-19-related demand destruction, that revived memories of the 2007-08 financial crisis pulled down the average LME aluminium price to $1,490 a tonne during April-June. At that price, smelters, irrespective of their using electricity derived from hydro, gas and coal, couldn’t keep their heads above water. Energy alone has a 35-40% share in the total aluminium production cost, and coal-fired electricity happens to be more expensive than the other two.
Unlike in Canada, where aluminium is smelted by hydro-power or in West Asia where it is smelted by burning natural gas, Indian smelters are solely dependent on thermal power. So, smelters here had to bear the brunt of demand- and price-retreat.
Even while the low prices hit Indian industry hard, India could contain some of the damage by exporting fair volumes of aluminium in the face of domestic demand shrinkage. The same was the experience of steelmakers here who surprisingly found a market for some of their surpluses in China. Faced with imports that generally have close to 60% share of the aluminium-market here, local smelters have always relied on exports to dispose of a significant portion of their production. Last financial year when the country’s aluminium demand was down by 6% (to 3.72 million tonnes), imports met 2.17 million tonnes of that. Imports, including large quantities of scrap, found to be over 20% cheaper than the local primary aluminium, cost the country $4.4 billion. This happened despite India having a smelting capacity of more than 4.1m tonnes, that is, well placed to meet the local demand (except for some special alloys).
If India has remained too liberal in allowing aluminium imports, many fear that global trade flows in the metal could be disrupted by the protectionist policies pursued by the US, which happens to be the world’s largest aluminium importer. The US imported 6.2 million tonnes of aluminium in 2017; this fell to 5.54 million tonnes in the following year and then again to 3.7 million tonnes in 2019. Fall in the US purchase of foreign-origin aluminium was largely because of the Trump administration’s invocation of 232 tariffs on aluminium and steel in March 2018, creating conditions for the revival of smelting, downstream extrusion and flat-rolled capacity. Even now, in further attempts to protect downstream manufacturers, the US commerce department is conducting anti-dumping and countervailing duty investigations on imports of certain types of aluminium foils from five countries, including Russia and Brazil.
When IMF speaks about a “deep recession” with global growth at -4.4%, how could LME aluminium cash (bid) price command $2,042.50 a tonne this month? Surprising the world with the strength of manufacturing rebound and overcoming lockdown pains, China, with its unexpectedly large imports of primary aluminium and alloys, is the principal trigger for the sharp LME/SFE price gains. China, according to IMF, will be the only exception among developed economies and emerging markets, recording a GDP growth of 1.9% in 2020 and then 8.2% next year. As Chinese aluminium demand picked up robustly following a fall of 1% y-o-y in the first quarter, the country (though it accounts for over 55% of world production of the metal) had imported 1.74 million tonnes (primary and alloys) in the first ten months of 2020 to meet the demand of user industries. Interestingly, in China’s aluminium imports, India had a share of approximately 28%, next only to Russia’s over 30%.
As demand here is nearing pre-Covid level, India’s 35% fall in imports of aluminium, including scrap, during July-September enabled local smelters to raise their share of the domestic market to 50% against a distressingly low of 42% in 2019-20. Shares of Hindalco, Vedanta and Nalco, have all gained because of the recent improvement in aluminium outlook. In the meantime, research agency Fitch Solutions has described India as a “stand-out growth market” for aluminium consumption, where the demand will rise to 8.7 million tonnes by 2029. The demand growth will be driven majorly by the “government driving investment” to eliminate the “sizeable infrastructure deficit.” India’s rich bauxite and non-coking coal reserves will support lifting smelting capacity to 10 million tonnes and more.
A former FT correspondent, the author is now India Correspondent of Euro Money publication Metal Market Magazine