Aluminium companies' profits to remain under pressure in Q3: Care Ratings

MUMBAI: Despite an expected average increase in the global aluminium prices, the profitability of the domestic aluminium producers is likely to remain under pressure in the December quarter, Care Ratings has said in a report.

Apart from a rise in raw material prices, increasing cost of power, following the rise in coal prices continue to remain a major concern for domestic aluminium players, bringing down their margins, it said.

After having peaked in FY07, margins of aluminium producers has been declining until FY10. The pick-up in global prices helped producers better their margins in FY11, though. Domestic prices tend to follow global prices as the domestic prices are based on the landed cost.

Commenting on domestic demand drivers, Care says the primary aluminium consumption grew robustly during FY02-FY06, growing at a CAGR of 15 per cent. But during FY06-FY11, compounded annual demand growth decelerated to 9.3 per cent, owing to the 2008 global financial crisis.

Aided by robust demand, the primary aluminium industry has been increasing their capacity at a CAGR of about 13 per cent during FY02 to FY11, while production rose at a CAGR of 11 percent during this period.

Care expects domestic demand to grow at a CAGR of about 8.5 per cent from FY12 to FY16. Domestic demand is likely to touch 2.4 million tonne by FY16.

Power, automobiles and the construction sectors, which contribute to about 50 per cent of the domestic end-use consumption, are likely to drive this demand, followed by packaging and white goods sector.

Care says, domestic smelter capacity to increase at a CAGR of about 11.4 per cent till FY16. During FY02 to FY11, primary smelter capacity rose at a CAGR of about 13 per cent, while consumption rose at a CAGR of about 12 per cent.

Owing to its competitive cost advantage, rendered by its bauxite resources, most domestic producers are undertaking huge capacity expansion.

A short-term bounce-back in demand and an improvement in global liquidity will help prices to remain elevated this year, says the report adding the average prices to improve further to around USD 2,400-2,500 a tonne this year.