Construction Industry News
The operating margin of Indian primary aluminium manufacturers is expected to increase by over 25% this fiscal year due to sustained healthy demand, better realizations, and a likely reduction in production costs driven by cheaper energy and alumina. This compares to an approximate 20% increase in fiscal 2024.
The industry is capital-intensive, requires upfront capital expenditure (capex) and is marked by volatile operating profitability. Therefore, an increase in operating profit will reduce reliance on debt to fund ongoing capex (mainly for increasing capacity and the share of value-added products and for operational linkages) and will support credit metrics.
A CRISIL Ratings study of three domestic primary aluminium producers, accounting for ~90% of the 4.1 million tonne (MT) domestic capacity, indicates as much.
Last fiscal, the improvement in operating margin was driven by a decline of more than 30% in power cost as domestic coal and energy prices stabilised after a meteoric rise in fiscal 2023 due to geopolitical uncertainty. This offset a moderation of more than 10% in aluminium prices (benchmarked with London Metal Exchange or LME prices), even as demand remained robust.
This fiscal, operating margin will improve on strong demand – both domestic and exports – besides an expected improvement in realisations and a likely reduction in production cost.
Ankit Hakhu, director, CRISIL Ratings says, “Domestic demand, which accounts for almost half of the domestic primary aluminium sales volume2, rose ~10% in the past two fiscals and is likely to rise 7-9% this fiscal. This will be driven by increasing adoption of the metal in the automotive segment along with healthy growth in the power and construction segments. Export demand is also likely to remain buoyant this fiscal as there are signs of recovery in the US and Europe. Added to this, increasing demand in China from the automotive and energy transition segments will push demand higher in calendar year 2024, after a lull in the past two years.”
Further, we expect average aluminium LME prices to inch up to $2,300-2,500 per tonne this year from last year’s average of $2,200. This will be supported by better demand, lower metal inventory (LME stocks at multi-year low) and potentially tighter global supply dynamics as China continues to cap annual aluminium production.
Ankush Tyagi, associate director, CRISIL Ratings says, “We also expect overall cost of production to decline a further 5-10% this fiscal, driven by lower spends on imported alumina (one of the key raw materials, accounting for ~30% of overall cost) and power and fuel (30-35% of overall cost). Players are enhancing upstream alumina refinery capacity, which should reduce dependence on imports. Materialisation of low-cost coal linkage, along with operationalisation of some of the captive coal mines, should reduce coal costs and thus power and fuel expenses this fiscal. Overall, we expect average operating margin to increase to more than $750 per tonne this fiscal from around $600 last fiscal, taking operating profit to above Rs 20,000-22,000 crore.”
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