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In the last year the Aluminum industry has been in the limelight. Sharp fluctuations in the international prices of aluminum has been the norm in the recent past. Prices of aluminum broke through the $1,600 per tonne at the London Metal Exchange in September 2000 only to come down sharply to the levels of $1,400 in October 2000. Till end December 2000, prices remained fluctuating between $1,450-1,550 levels.

Analysts are of the opinion that the International prices of aluminum are expected to remain firm in 2001. Much of this optimism stems from the fact that the industry has managed to remove excess capacity creations of the past and reduced warehouse inventories considerably over the past few years. The combined impact of this has contributed to effective utilization rates of aluminum metal at over 95 per cent. At these rates, the prospects of a price rally or at least stable prices seem rather bright.

The year 2001 started on a bullish note with prices surging past the $1,700 per tonne. However since the beginning of February, prices have once again dipped sharply to the levels of $1,550 per tonne. Infact, Pechiney, a global aluminum major, has projected an average price of $1,600 per tonne for aluminum in 2001.

However, the picture is not completely hunky-dory for the industry. The two critical factors which may impact the future price trends in aluminum are the slowdown in the US and the continuing fragile state of the Japanese economy. If the slowdown in the US develops into a full blown recession, it will obviously affect domestic consumption levels in one of the key regions of the globe. But here again, the impact on aluminum will be limited due factors such as the rising power costs in the US Northwest that are creating supply-side bottlenecks.The continuing slump and low growth potential of the Japanese market is another factor impacting the aluminum market.

Overall, the outlook on the prices for the Indian companies appears bright. Firm international prices and a depreciating rupee increases the protection factor for the aluminum producers. Another positive factor for Indian companies is the improved outlook for exports. Rising power costs in the Northwest of US has lead to a shutdown of a few smelters. This will allow Indian companies to fill in the supply-demand gap in the export markets. Exports are also likely to prove more lucrative to the Indian companies given the discount at which the metal is being sold in the domestic markets.

Although aluminum demand is estimated to increase annually at the rate of 7 per cent, any slowdown in key consuming sectors such as power, consumer goods and transportation may lead to sluggish demand growth and consequently maintain a tight leash on prices.

Notwithstanding the concerns regarding domestic demand, the outlook continues to be rosy on the profitability front for the Indian companies. In the first nine months ended December 2000, aluminum output has increased only 4.6 per cent. Profit growth, however, has been much better due to the firm trends in prices. Similar trends are likely in the next year for companies such as Hindalco and National Aluminum Company. Investors will do well to concentrate on these two aluminum giants to add returns to their portfolio.

Aru Srivastava

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