India’s secondary aluminium makers are not perturbed by the import levies announced by the Donald Trump administration. What has disconcerted the fragmented industry is the inverted duty structure perpetuated by the federal government in the country. What’s more, the unabated exports of primary aluminium both unwrought metal and some rolled products and ingots have unnerved the secondary sector.
The secondary aluminium industry in India represented by Aluminium Secondary Smelters Association (ASMA), claims a litany of woes. The skewed duty structure has squeezed their capacity utilisation and operating margins. To buttress its claims, ASMA cites China’s example where a five per cent export duty is levied to discourage exports of bauxite, alumina and primary aluminium. Conversely, to incentivise downstream products exports such as extrusions, rolled products and foils, the Middle Kingdom provides an export subsidy of 13 per cent.
In India, the import duty on primary aluminium and downstream products is taxed alike at 7.5 per cent. By contrast, the picture in neighbouring countries on duties is the very antithesis of India’s. In other nations close to India’s territorial land or water borders, the import duty on primary aluminium is five per cent, whereas on downstream products like extrusions and rolled products the levy ranges between 15 and 25 per cent. This gulf in duties between primary and secondary aluminium imports in India’s neighbouring countries is shown in the chart below:
As a result, ASMA claims that if the Indian government is serious about developing the secondary aluminium ecosystem, it needs to slash import duties on primary aluminium metal from 7.5 per cent to nil or at least 2.5 per cent. What’s more, the import duty on downstream aluminium products needs to be expanded from 7.5 per cent now to at least 20 per cent. The changes in duties will contribute to the ramp up in operations of the secondary producers and scale up consumption within the country.Source: ASMA presentation.
India’s downstream industry landscape
India’s downstream aluminium ecosystem is made up mostly by small and medium enterprises (SMEs). They are engaged in manufacturing extrusions, rolled products, cables & conductors, auto castings and utensils. Though there is a proliferation of such industries (there are around 3500 units), they manage to operate at 55-60 per cent of their nameplate capacities. The reason for this boils down to the unavailability of primary aluminium at competitive prices. Secondary producers are constrained to buy the primary metal from big producers like Vedanta and Hindalco Industries. What’s more, in order to buy aluminium, the secondary players need to fork out a premium of 14 per cent over LME (London Metal Exchange) prices. This makes the domestic pricing of aluminium dearer than the international rates.
This pricing system has been in effect since April 2018 as the two primary producers (Vedanta & Hindalco) – which between them control 90 per cent of the output – are accused by ASMA of behaving like a cartel . To add insult to injury, the secondary producers then have to compete with these primary players in marketing the downstream products. Interposed between the large primary producers and the fragmented and unorganised sector, major secondary players like Century Extrusions, Paragon Industries, Indo Alusys Industries and White Metals Ltd are forced to operate at tiny margins with barely any capital for technology upgradation.
Per ASMA’s estimates, domestic aluminium prices have strengthened by about 40 per cent in the span of a year. The prices have been lifted by LME price swings and the predatory pricing effected by the monopolistic primary aluminium makers. ASMA believes aluminium has become more expensive due to unjust state support awarded to the primary producers. Also, the fact that primary manufacturers have diversified into downstream products has triggered an unfair competition and stifled the market for secondary producers. India’s primary aluminium industry has more than doubled from 1.6 million metric tonnes (mmt) in financial year (FY) 2010-11 to 3.4 mmt in FY 2017-18. The downstream industry, on the contrary, has lagged as their margins are increasingly squeezed. As if this wasn’t enough, the dumping of downstream products from China continues to be a sore irritant.
Promote scrap imports, widen aluminium consumption to fuel secondary growth
Indian secondary players are often at loggerheads with their primary counterparts on imports of scraps. Primary producers have been lobbying the federal government to halt scrap imports – a notion that has exasperated secondary aluminium makers. Doing so will hurt the operations of the 3500 industries in secondary space. Next, it could pose a real risk of replacement by imports of alloy ingots from countries in South East Asian region that have signed Free Trade Agreements (FTAs) with India. Alloy ingots are absorbed by the automobile industry and India still largely depends on their imports as the primary manufacturers are yet to develop core competencies in this segment.
Usage of scrap has its own merit as it consumes a measly five per cent of the energy needed to make aluminium through the smelting route. In India, energy costs are 40-45 per cent of the aluminium manufacturing cost as inflationary coal powers the smelters. And while scrap pricing is linked to LME aluminium prices, it is still cheaper than the metal. For secondary producers, aluminium scrap is available at a discount of Rs 10,000-15,000 over the price of a freshly smelted metric tonne. Scrap has limited use amongst extrusions and rolled products makers where high purity is the key consideration. But aluminium scrap is consistently used by automobile industry and utensil makers as their major raw material. Prices of their finished products are contingent on prices of aluminium scrap. Any increase in import duties on scrap is bound to have serious repercussions on a bevy of small industries across the aluminium value chain.
In India, there is no system of scrap collection, though the country still produces roughly 0.6 million tonnes of secondary aluminium through captive processing of seconds and scrap imports. Since the cost of primary aluminium smelting is high in India, the secondary producers depend upon imports of aluminium scrap from the Middle East, China, South Africa, China, Taiwan, Nigeria, Spain, Australia, Malaysia and the EU.
Aside from encouraging scrap imports, India can diversify its aluminium consumption basket. There are barely 300 aluminium applications in the country compared with over 3000 worldwide. India’s per capita aluminium usage is only 2.6 kilograms – compared to the global average of 11 kilograms – and this modest consumption base offers a huge opportunity to build the case for widening downstream applications. The country’s swift strides in urbanisation, the pledge to build 100 Smart Cities, expanding the Metro rail network, burgeoning automotive industry et al, offer ample potential.