Better cost dynamics of recycled aluminium has led to surge in its share in aggregate aluminium consumption in India. In the three years through fiscal 2019, usage of primary aluminium logged a compound annual growth rate of 3.5-4%, while that of recycled aluminium zoomed at a robust 17-18%.
As a result, the share of recycled aluminium in aggregate aluminium market in India stood at 34% as of fiscal 2019, up 800 basis points (bps) from 26% three years ago. This is in line with the global trend, though the proportion is much lower compared with developed economies.
Fuelling this growth is the better cost economics recycled aluminium offers. For instance, the ADC-12 alloy manufactured using recycled aluminium is 15-20% cheaper than that made with primary aluminium.
Added to this, there is healthy demand for non-ferrous castings from the automotive sector, which consumes ~65% of recycled aluminium in India. Further, demand from the building & construction sector, which consumes 10-15% of overall recycled aluminium, has also increased with rising penetration of recycled extrusions, especially in window frames.
Going ahead we expect a bump in the growth trajectory for recycled aluminium in near term on account of slowdown in growth in two-wheelers as well as passenger vehicles. However, in medium term the growth should be intact.
Says Prasad Koparkar, Senior Director, CRISIL Research, “Demand for recycled aluminium has outpaced primary aluminium demand by 2.3-2.4 times over the last five years, led by better cost-economics, especially in the price-sensitive automotive castings space. This, in turn, has led to a surge in scrap imports, which soared to 1.35 million tonne in fiscal 2019, up from 0.7 million tonne in fiscal 2014, due to limited availability of optimum quality of scrap in domestic market.”
Higher share of imported scrap at 85-90% (as compared to domestic scrap) is largely on account of lack of efficient ecosystem in India for scrap collection, segregation, and processing facilities (such as scrap yards). We primarily import our aluminum scrap needs from Europe and Middle East.
As for domestic primary aluminium producers, these have been able to operate at healthy capacity utilisation levels despite the competition posed by aluminium scrap imports, as the surplus production has been exported.
The share of exports in primary aluminium production increased to 52% in fiscal 2019 from 33% in fiscal 2015. In fiscal 2019, Asia (largely Malaysia and Korea) accounted for 47% of India’s primary aluminium exports, followed by Europe with 29% share.
In the near term, however, exports are likely to see a sedate run as low-cost producers in Russia and the Middle East expand/ ramp up capacities and compete for European markets, which fetch better realisations. In fiscal 2020, CRISIL estimates exports to be rangebound at around 1.9 MT over previous year.
Primary aluminium demand in the domestic market is also expected to be slow at 4-5% in current fiscal given tepid ordering from PGCIL (power is 55% of primary aluminium demand) and slowdown in automotive segment.
Says Hetal Gandhi, Director, CRISIL Research, “Slower domestic demand, rising competition from recycled aluminium, downtrend in prices, and mounting uncertainty in global trade are key challenges for primary aluminium makers. However, softening cost structure will still enable a 50-100 bps improvement in their operating margins in fiscal 2020. To counter the threat, primary aluminium makers are venturing into the value added products space which should enable better margins.”
Capacity additions planned by the primary producers are mainly in the value added space, including wire rods, flat rolled products, extrusions, and alloy. This is expected to limit imports of primary aluminium products, which typically constitute 20-25% of primary aluminium consumption in India. This should enable higher realisations and thereby uptick in profitability, though only in the medium term, once these capacities commission post 2021.