Indian primary aluminium manufacturers are projected to experience operating margin growth exceeding 25% this fiscal year, driven by robust demand, improved realisations, and a reduction in production costs due to cheaper energy and alumina. This marks a significant increase from the approximately 20% growth seen in fiscal 2024, according to a report by CRISIL.
The aluminium industry, known for being capital-intensive with significant upfront capital expenditure (capex) requirements, often faces volatile operating profitability. Therefore, the anticipated increase in operating profit is expected to reduce reliance on debt for ongoing capex projects, including capacity expansion and enhancing value-added products, thus supporting credit metrics.
CRISIL Ratings examined three major domestic primary aluminium producers, which together account for about 90% of the 4.1 million tonne domestic capacity, to arrive at these conclusions.
The improvement in operating margins last fiscal was largely due to a more than 30% decline in power costs as domestic coal and energy prices stabilized following a sharp rise in fiscal 2023 due to geopolitical uncertainties. This offset a more than 10% decline in aluminium prices, despite sustained robust demand.
This fiscal, CRISIL expects operating margins to improve further on the back of strong demand, both domestically and in export markets, alongside better realisations and likely reductions in production costs.
"Domestic demand, which accounts for almost half of the domestic primary aluminium sales volume, rose approximately 10% in the past two fiscals and is likely to rise 7-9% this fiscal. This will be driven by increasing adoption of the metal in the automotive segment along with healthy growth in the power and construction segments. Export demand is also likely to remain buoyant this fiscal as there are signs of recovery in the US and Europe. Added to this, increasing demand in China from the automotive and energy transition segments will push demand higher in calendar year 2024, after a lull in the past two years," said Ankit Hakhu, Director, CRISIL Ratings.
CRISIL also anticipates average aluminium LME prices to rise to $2,300-2,500 per tonne this year, up from last year's average of $2,200, supported by better demand, lower metal inventory, and potentially tighter global supply dynamics as China continues to cap annual aluminium production.
"We also expect overall cost of production to decline by a further 5-10% this fiscal, driven by lower spends on imported alumina (one of the key raw materials, accounting for approximately 30% of overall cost) and power and fuel (30-35% of overall cost). Players are enhancing upstream alumina refinery capacity, which should reduce dependence on imports. Materialisation of low-cost coal linkage, along with operationalisation of some of the captive coal mines, should reduce coal costs and thus power and fuel expenses this fiscal. Overall, we expect average operating margin to increase to more than $750 per tonne this fiscal from around $600 last fiscal, taking operating profit to above Rs 20,000-22,000 crore (approximately USD 2.4-2.64 million)," said Ankush Tyagi, Associate Director, CRISIL Ratings.
The increased EBITDA will support prudent funding of Rs 15,000 crore (approximately USD 1.8 million) in aluminium capex in fiscal 2025 for the completion of ongoing smelter capacity expansion by around 10% and improving forward and backward integration to maintain global cost competitiveness. This, in turn, is expected to keep debt in check, improving debt metrics and supporting credit profiles.
