ALUMINIUM : Negative impact due to reduction in customs duty

Budget provisions

There were divergent expectations from the primary and down stream / secondary producers. While the primary producers wished the import duty on aluminium to remain or increase, the down stream / secondary producers urged for increase in import duty. Ultimately, the urge of the latter prevailed over the wish of the former.

Reactions

AJS Jhala, Joint President-Finance, Hindalco Industries said, "The budget was a mixed bag for me. While the customs duty reduction on aluminium is some what negative for the company, the 15 per cent additional depreciaiton allowed on new plant and machinery after April 1, 2002, is definitely positive.

"At the current 15 per cent customs duty level, the company is still competitive as Hindalco's products are priced at Rs 1500 to Rs 2000 per tonne lesser than the landed cost.

"However, the aluminium industry will certainly have to worry if the LME prices goes below US$ 1340 per tonne."

Current Status of the Industry
The domestic demand has marginally slowed down due to low growth in the construction and Industrial sector, apart from the commercial vehicles segment. While the demand growth in FY 2001-02 is expected to be a mere 2.5%, the exports are likely to fall significantly by 18.87%. The expected fall in exports is mainly on account of loss of production at Balco. Production loss at Balco was on account of labour unrest after sellout to Sterlite Industries. The exports were also partially impacted by sharp 15.29% fall in aluminium prices at LME from US$1615.65 per tonne in Jan’01 to US$1368.59 per tonne in Jan’02.

Impact of the Budget on the industry
The reduction in import duty on aluminium from 25% to 15% will affect the industry’s margins, as the domestic prices needs to be brought down. Nevertheless, the downstream secondary producers are likely to be benefited. Further, the possibility of increased penetration of value added products like aluminium foils, due to fall in prices, cannot be ruled out.

Despite sharp fall in international prices in 2001, the domestic aluminium prices did not reflect equivalent sharp fall in prices, as it had the cushion of import duty. Now that the import duty has been reduced, the pricing power of the industry is handicapped.

The emphasis on reforms in power sector will benefit the aluminium industry, atleast in the long term, as over 34% of the domestic aluminium consumption is from the power sector.

The net impact of the changes proposed in the direct taxation will benefit the leading players of the industry. Overall, the impact of budget on the industry is however negative. Nevertheless, considering the fact that Hindalco and Nalco are one of the world’s least cost producers, though their margins will come under pressure, their survival and growth is least affected.

Company impact
The margins of Nalco, Hindalco and Malco are likely to be adversely affected. However, the impact on Nalco is likely to be higher as its share of secondary products is relatively low compared in Hindalco. The negative impact on Indal is likely to be marginal because it is more into downstream products, and procures primary aluminium from Hindalco.

Companies to watch
Nalco and Hindalco for negative developments and Indal for relativ

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