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AL CIRCLE

India: Primary aluminium producers to face compressed operating margin due to soaring production cost

EDITED BY : 2MINS READ

On Monday, October 31, a report from CRISIL showed a high possibility of Indian primary aluminium producers’ lower operating margin by more than 1200 basis points (bps) this financial year to 22-24 per cent, owing to decreased realisations and soaring production costs.

India: Primary aluminium producers to experience compressed operating margin due to soaring production cost

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Last fiscal year, primary aluminium producers experienced a record operating margin at a decade high of 36 per cent, backed by strong realisations for historically high global aluminium prices amid post-Covid economic recovery. This year, the operating margin is expected to downtrend to match past levels but be higher than the average of 17 per cent over FY2017-21, found CRISIL based on the analysis of three companies that account for the entire domestic capacity of 4.1 million tonnes.

However, amid a dip in operating margin, operating profit is seen to remain steady, partly due to solid demand growth by 6-7 per cent Y-o-Y from the power and construction sectors. These two sectors account for 70 per cent of total sales volume.

For primary aluminium markers, profitability depends on global and domestic factors that control prices and costs. In recent times, the global aluminium prices on LME have fallen 40 per cent from the March 2022 peak to US$2,300 per tonne due to extended lockdowns in China and growing recessionary pressures impacting global demand.

According to Ankit Hakhu, a director at CRISIL, LME aluminium prices are likely to continue at around current levels through H2 2022 due to low inventory levels and production cuts in Europe. Global demand is also expected to shrink by 1-2 per cent this year after growing over 5 per cent in 2021.

Future of the Global Aluminium Castings Industry

Production cost is likely to rise 10 per cent, with power costs projected to increase the most among all. But despite the increase in input costs, the production cost for Indian domestic producers is still among the lowest in the world.

Ankush Tyagi, an associate director at the agency, added that primary aluminium producers in India are expanding capacities by 30 per cent, while refineries expanding by over 100 per cent.

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EDITED BY : 2MINS READ

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