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With the U.S. placing tariffs on China sparking trade tensions after aluminum and steel tariffs it is important to anaylse the backdrop with the production and demand gap. Then throw in the ramp in production in India and China. Is India the next target?

India aluminum

Demand and Supply Imbalance

Outside of China, demand for aluminum fell seasonally by 0.7 percent in the fourth quarter compared to the third quarter, while the year-on-year increase from the fourth quarter of 2016 was 4.1 percent.

Consumption outside China amounted to 7.3 million mt for the fourth quarter of 2017. Corresponding production amounted to 6.9 million mt, an increase of 1.2 percent compared to the third quarter. Production outside China experienced a 1.2 percent increase compared to the fourth quarter of 2016, largely driven by ramp up of new production capacity in India.

Demand for primary aluminium outside China grew by around 3.4 percent in 2017, and is expected to grow by 3-4 percent in 2018. Production outside China is expected to increase by 3-4 percent in 2018.

Compared to the third quarter of 2017, Chinese aluminium consumption increased by 0.8 percent to 8.9 million mt. The year-on-year increase compared to the fourth quarter of 2016 was 6.9 percent. Corresponding aluminium production decreased by 1.6 percent compared to the third quarter, but increased 5.6 percent compared to the fourth quarter of 2016.

The Chinese government has announced that they will continue with smelter curtailments next winter in order to reduce air pollution in a number of Chinese cities. Production of primary aluminium in China grew by 13.4 percent in 2017, but due to the capacity control measurements that were introduced in 2017 production increase is expected to be dampened to around 4-6 percent in 2018.

India Aluminum Output Transforming Quickly, At Threat From U.S. Tariffs

In India domestic output has been increasing with increased capacity while India's consumption has not kept pace. In April-January 2018, according to a Care Ratings report exports of steel rose by 40.2%, and aluminium production rose from 1.4 million tonnes to 2.8 million tonnes between FY14 and FY17, but consumption rose from 1.6 million tonnes to only 1.9 million tonnes. This shift saw a sharp jump of 57% in aluminum exports in FY17.

India was a net importer of steel just two years ago and now it is a net exporter, with net outbound shipments of around 3 MT, after the government introduced protective measures. This trend has not gone unnoticed in the US trade halls. Of the total exports from India, US accounts for only 2% at this time, but experts are concerned that supplies earlier bound for the US, may be dumped in expanding markets such as India, especially from suppliers such as South Korea, Russia and Japan.

This may also impact the improving demand-supply scenario. In the first nine months of FY18, the domestic steel industry has grown at 4.5%, as compared to a mere 3% in FY17. Indian companies in the aluminium and steel sectors, with exposure to global markets, are expected to be affected to a larger extent.

Among companies, Hindalco Industries and Tata Steel have significant operations overseas.

Tata Steel's European operations will be under pressure and JSW Steel, which derives about a fifth of its sales from exports, may also be affected. Other steel companies such as SAIL, Tata Steel India and Jindal Steel and Power may not be affected, as the majority of their sales are in the Indian market. Tata Steel's European steel operations are likely to feel the heat. Even with the joint venture of Thyssenkrupp and European Business, the main region of operation will remain Europe.

Any significant downturn in steel demand or prices is a risk to be watched for. Hindalco's subsidiary Novelis buys aluminum metal for scrap, which is used to make products such as beverage cans or products used in the automobile industry. The impact on Novelis is likely to be less than expected, since Canada's steel and aluminium industry is exempted. The March quarter results of the company, will provide information to the investors on what impact the tariffs are having on its business.

Source: Norske Hydro

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