Aluminium capex to grow 3-fold in next 5 years

A recent study by CRISIL highlights solid long term prospects for aluminium sector despite short term headwinds. Healthy OPMs will push local aluminium manufacturers to spend Rs 70,000 crore over next five fiscal years to 2027. The capex to expand capacity will be 3-times what was incurred in last 5 fiscals.

In India, the aluminium manufacturing capacity of 4.1 million tonne per annum (MTPA) is monopolized by 3 companies viz. Vedanta, Hindalco and NALCO. The trigger for aluminium demand comes from strong expected prices of aluminium and higher spending on infrastructure, electrification and transition to EVs. Emission concerns will keep global capacity utilization in check.

While the global demand for aluminium is expected by CRISIL to stay flat to marginally positive, the domestic demand for aluminium is likely to increase by 6-7% in near term and 4-5% in medium term. The green transition in terms of renewable capacity and the capacity of electrical vehicles is extremely aluminium-intensive which will be a key factor driving aluminium demand.

There are several triggers for aluminium sector. Firstly, better product mix will boost profitability of aluminium companies. Secondly, backward integration is likely to sustain cost-competitiveness for aluminium companies, with India already among the lowest-cost producers in the world. This will help in export competitiveness. Despite the sharp spike in smelter capacity, the capacity utilization is expected to be robust at over 90%.

With easing input cost inflation, improved domestic coal availability and focus on captive mining, CRISIL expects aluminium sector profitability to stabilise at 27-29% in FY23. The return of China to the mainstream will help boost demand and ensure supply chains are well oiled. The sector is expected to maintain net debt / EBITDA ratio of 2.5X and interest coverage of 8X in the next few years.