Aluminium industry operating margin to decline due to higher production : CRISIL
Operating margins of Indian primary aluminium producers is expected to decline more than 1,200 basis points (bps) this fiscal to 22-24% from a decadal high of 36% seen last fiscal, said CRISIL Ratings on Monday, adding that the decline is due to lower realisations and higher cost of production, mainly power.
As per CRISIL Ratings, domestic primary aluminium producers saw record earnings last fiscal on the back of strong realisations when prices reached a historical high amid post-Covid economic recovery, with the global aluminium market turning supply deficit. In the current fiscal, however, operating margin is seen retreating closer to past levels, but would still remain higher than the average of 17% over fiscals 2017-21.
“Despite the moderation in margin, operating profits may remain better than the past 5-year average, partly owing to strong domestic demand growth of 6-7 percent on-year for aluminium products, mainly from the power and construction sectors. The two comprise 70 percent of total sales volume for these manufacturers,” it said.
The rating agency highlighted that London Metal Exchange (LME) prices for aluminium have fallen 40% from the March peak to $2,300 per tonne because of extended lockdown restrictions in China and growing recessionary pressures impacting global demand in the first half of calendar 2022. Global supply remained robust driven by production increases in China amid relaxation of power restrictions.
“Prices in the second half of the fiscal are expected to remain range-bound around current levels, supported by low inventory levels at LME and recent production cuts in Europe which may partly offset the impact of higher Chinese production. Overall, global demand is expected to contract 1-2% in calendar 2022 after growing over 5% in 2021, against an expectation of a moderate growth in global supply in the current year. Consequently, average LME price for the metal will range between $2,300- $2,500 per tonne through fiscal 2023 (against $2,774 per ton in fiscal 2022). Domestic realizations are also expected to dip in sync, as they are driven by the landed cost of imports,” said Ankit Hakhu, director, CRISIL Ratings.
According to CRISIL, the cost of production for domestic producers can rise 10% on year, driven by rising coal prices. Power cost, constituting 30-35% of production costs is projected to increase the most among all costs, fuelled by an increase in energy demand and disruption in global supply chains brought on by the Russia-Ukraine conflict.
“Domestic producers rely on market purchases for 30 percent of their coal requirements. Further, for linkage coal, materialization will be lower this fiscal as priority is being accorded to the power sector. Despite the increased cost of production, Indian producers are still among the lowest cost in the world driven by highly integrated operations with 70-75 percent backward integration, on average. As a result, Indian producers currently export over 60 percent of their annual production,” it added.
While capex intensity for domestic producers will increase, planned capex over the next five fiscals is likely to be around thrice that spent over the past five fiscals. Annual operating profit for this fiscal, despite moderation, is expected to be sufficient to cover ongoing capex.