A renewal in calls by some in India’s aluminium sector for an increase in import duties on scrap and primary aluminium, has been seen since the fall of 2018. The country’s Commerce Ministry has taken up the baton and has urged that such a hike be part of the government’s next iteration of the budget.
The debate over the wisdom of such a move has largely been split between two camps. On one hand, domestic companies argue they want protection from as they say “low-cost” increasing imports undercutting production from their own smelters, and on the other, downstream players reject any increase and argue in favor of cheaper aluminium. Faced with pressure from industry representatives, the Commerce Ministry is currently supporting a flat rate of 10% on primary aluminium and scrap (up from the current level of 7.5%, and 2.5% respectively). But are the economics of such a possible hike sound?
The latest call for a raise in import duties went out after government stats showed a spike in HS code 76 aluminium over the prior fiscal year (April 2017 through March 2018), which increased to 1.96 million metric tons. But while the number also includes a 57% rise in scrap aluminium imports from all destinations including the EU, it represents only a small facet of the issue. All in, aluminium imports of all varieties were actually down in the last fiscal year, and the nation’s smelters ran at near-peak capacity, producing 3.39 million tonnes against an estimated consumption of 2.08 million tonnes. The surplus is evident and is starting to resemble the Chinese one.
India’s aluminium imports (2009-2016)
Even assuming that a raise in tariffs is justified, such a hike would likely not touch the majority of aluminium imported on preferential basis. Per the numbers, fully half of all imported aluminium originate from countries with which India has free trade agreements, including Malaysia, Thailand, Vietnam and the Republic of Korea among others. That percentage is likely to increase, as the government is currently negotiating similar agreements with the Gulf Cooperation Council (GCC) who took one of the leading positions in the production of the light metal. In light of this, an increase in import duties and the halting of imports of aluminium and aluminium products would likely result in increased import flows from the same countries with whom India has FTAs. This may well end up doing more harm than good to domestic smelters.
What about FTAs?
In addition, trends in consumption strongly suggest that increased imports of primary aluminium, especially scrap, will become ever more important in the coming years. The vast majority of scrap aluminium buyers come from among the country’s small- and medium-sized enterprises (SMEs), who are in the market for aluminium alloys not commonly produced by India’s aluminium smelters. SMEs that produce manufacturing extrusions, rolled products, cables and conductors, auto casings, and utensils occupy a quite tenuous perch in the national economy, squeezed between three large domestic suppliers who control the vast majority of raw aluminium and the razor-thin margins that separate profitability from insolvency.
Making life even more difficult for SMEs was a 40-percent jump in aluminium prices last year and an ever-stiffer competition from UPVC, steel, and plastic products. Heaping an additional import duty cost may well prove to be the coup de grâce for legions of India’s roughly 3,500 SMEs that are already struggling to compete.
Aluminium prices already high
Aluminium prices in India are already around 14 percent above LME prices due to Delhi’s commercial policy, and despite India’s place as one of the cheapest countries in the world to make raw aluminium. Downstream stakeholders have long complained that the country’s handful of primary aluminium producers have been given outsized support by the government, noting that the favoritism shown to the upstream giants allowed them to double output since mid-2010 while downstream growth stagnated under the weight of microscopic margins.
The booming electronic, automotive, construction, and packaging sectors in the country have helped buoy demand over the past several years as well. And, though that demand includes a certain portion of aluminium produced within India’s borders, the specialty aluminium needed in those industries has also forced firms to scour sources from abroad. Between 2015 and 2017, demand for unavailable aluminium alloys rose significantly, driving up imports of alloyed aluminium by over one-third in that time frame.
And exports are rising, too
While primary producers say low-cost imports are robbing them of domestic market share, the numbers indicate that their primary buyers are outside India. From 2015 to 2017, India’s aluminium smelters’ exports rose by 83 percent, to over 1.3 million metric tons. In contrast, incoming aluminium fell by 46 percent in that period, with imports for the first half of 2018 continuing the same downward pattern. Primary aluminium is not the only market where Indian aluminium firms are making headway. For example, since 2015, exports of specialty aluminium alloys skyrocketed by 163 percent.
All things considered, the calls coming from India’s primary aluminium industry for a hike in import tariffs make little economic sense. What little reward may be reaped will pale in comparison to the tremendous damage wrought to the broader Indian economy, robbing downstream stakeholders of the competitive edge they currently enjoy and jeopardizing the existence of thousands of SMEs to satisfy a handful of upstream interests.