Title: Mid Term Assignment for Project Report Groups Subject: Managerial Economics Batch: 2012-14 Section: E Word

Count: Page Count: Group Members: Sr.No. Name 1. SHWETA HASIJA 2. SHRUTI SHARMA 3. ROUNAK VIRDI 4. SAPTARISHI DASGUPTA

Group No:

Roll. No. 2012305 2012301 2012260 2012270

PROJECT REPORT On
Oligopoly market structure of Aluminium Industry in India

NEWS ARTICLE

India's aluminum export to rise 5 pct: Vedanta

By Deepak Sharma and Jatindra Dash
MUMBAI | Fri Aug 17, 2012 7:36am EDT

(Reuters) - India's aluminum exports could rise 5 percent in the current fiscal year to 325,000 tonnes, despite a slowdown in global demand, a senior industry official said, as falling prices have led rival global producers to cut production.
Declining aluminum prices have forced major players such as Alcoa (AA.N) and Norsk Hydro (NHY.OL) to cut output and have prompted China, the world's largest consumer of the metal, and Japan to ramp up purchases. "Due to the sudden closure of some of the smelters in the U.S.A., the export demand has slightly improved," Mukesh Kumar, president of Vedanta Aluminum Ltd, India's largest aluminum producer, said in an interview. Vedanta Aluminum, a part of billionaire Anil Agarwal-controlled Vedanta Group (VED.L), produces about 40 percent of the South Asian nation's total output. India exported 310,000 tonnes of aluminum in 2011/12, he said. Aluminum prices have fallen this year alongside other metals as the global economy has cooled. The benchmark three-month LME aluminum contract on Friday, at $1,846.25 per tonne, was down 22 percent from its year-high in March. Indian aluminum exports to South Korea, Japan and China are currently priced at a premium of $223-$230 per tonne above the LME benchmark, lower than the $240-$260 premium from other countries, traders said. Low costs and availability of better grades of inputs such as bauxite give Indian smelters an edge over other suppliers, but bureaucratic and environmental delays have limited the availability of coal, a major fuel for aluminum production. "The capital expenditures and operating costs in India's plants are nearly 70 to 80 percent of the world average cost due to highquality bauxite, rich coal deposits and low labor costs," Kumar said. "India is blessed with high quality bauxite and coal but the delay in processing of applications (for allotting mines) is the main cause of concerns," he added. India produces around 1.6 million tonnes of aluminum and consumes about 1.3 million tonnes annually. Its domestic demand is poised to grow by 7 to 8 percent a year, led by its power transmission, construction and automobile sectors.

http://www.reuters.com/article/2012/08/17/us-india-aluminium-exports-idUSBRE87G0CA20120817

INTRODUCTION
Aluminium is the second most important metal after steel. The Indian economy is growing at a consistent rate of about 8% and due to this there is an increase in the domestic demand for the metal which is most widely used in various sectors for various purposes. There is a huge growth in demand for the metal both in domestic market as well as in the international market which is mainly driven by China. The production of primary aluminium in India is dominated by the old players; there has been no new entrant into the market including the major metal industries like Arcelor Mittal etc. The objective of the report is 1.To study the global as well as domestic production and consumption patterns. 2.To study the type of Indian Primary aluminium markets and its key playe rs. 3.To study the reasons for the primary aluminium market being an Oligopolistic market and the barrier to entry.

Indian Aluminium Industry The Indian aluminium sector is characterized by large integrated players like Hindalco and National Aluminium Company (Nalco). The other producers of primary aluminium include Indian Aluminium (Indal), now merged with Hindalco, Bharat Aluminium (Balco) and Madras Aluminium (Malco) the erstwhile PSUs, which have been acquired by Sterlite Industries. Consequently, there are only three main primary metal producers in the sector namely Balco (Vedanta), National Aluminium Company (Nalco) and Hindalco (Aditya BirlaGroup). Analysis of Indian Primary Aluminium Market Type of Market The primary Aluminium production market in India is an oligopolistic market. The primary aluminium is a homogenous product. As the product is homogenous the market is Pure Oligopoly. There are only 3 players in the aluminium market in India with total production of 1250 KT in 2008. The entry into market is possible but not easy due to the heavy initial capital that is required to setup the plant. As aluminium is a homogenous product there is no price war between the three players and these firms are price takers. Though the company sells the product at price which is decided by them, the firms mostly go by the price on the London Metal Exchange (LME). In the Indian aluminium industry all the firms are price takers and there is no clear leader as all the 3 firms have almost equal market share. The price is decided by demand and supply in the commodity market. The reasons for the aluminium industry to be an oligopoly are: Economies of Scale: .The major input in producing primary aluminium is alumina and power which constitute about70% of the cost in producing. Although the requirement of alumina does not vary much with the size of the plant but the consumption of power varies drastically. Hence with higher production capacity the cost of production goes down. For a new player producing aluminium and low cost will be very difficult.
Huge capital investments:

.The capital required to setup an aluminium production plant is huge. E.g.: BALCO spent about $1 billion to set up a 2.45 lakh ton capacity with 540MW power plant.
Time to setup:

.It requires around 3 years to setup a plant of the size mentioned in the above example. The new player would require about 3 years to start manufacture primary aluminium and the market demand supply equation can change by the time the firm starts manufacturing. Control over the Bauxite mines: .As the raw material for manufacturing aluminium is bauxite the existing players have control over the bauxite mines in India and it would be difficult for a new player to get new bauxite mines.
Scarcity of power:

.About 30-40% of the cost of producing is power. As producing primary Aluminium requires a large amount of electricity they need to have captive power plants. Setting up of captive power plants requires huge capital investment and also requires a lot of time. The basic raw material to generate power is coal. Hence the firms also would need to have coal mines. Most of the coal blocks are owned by independent power producers and hence the coal blocks are scarce.
Government Factor:

.The other major hurdles are getting environmental clearance from the government. The other factor would be in getting bauxite mines allotted to the firm. Hence in these two cases the government acts as a barrier.
Land:

.Existing players can expand as setting up a new brown field project is easy than getting land allocated for a new green field project considering the political situations in India.
Geographical factors: .The bauxite ore is abundant only in the states like Orissa and hence the firms entering into the market need to setup the plant in these states. PRICING OF PRIMARY ALUMINIUM

The major trading centers of aluminium in the world are London Metal Exchange (LME) Tokyo Commodity Exchange (TOCOM) Shanghai Futures Exchange (SHFE) New York Mercantile Exchange (NYMEX) These above mentioned commodity exchanges provide direction to the world aluminium prices. In India, aluminium is also traded at various commodity exchanges namely Multi Commodity Exchange of India and National Multi Commodity Exchange of India. Aluminium traded at around US$2,000 per tonne in the beginning of 1980 and since then witnessed a declining trend till 1986. The price plummeted to as low of US$919 per tonne in June 1982. The prices hovered around US$1,200-1,400 per tonne between 1982 till the middle of 1987. The prices breached 2000 US$ per metric tonne barrier in January 1988 and in the month of June reached an all time record-high of US$3,578 per tonne mainly on account of supply constraints in the world market. The late 1980s and early 1990s again saw a slump in prices due to collapse of USSR and resulting flood of aluminium into the world markets by the CIS countries, followed by an upswing in prices mid-decade and a declining trend again at the end of the decade. Post 2000, prices have stayed at US$1,2001,400 per tonne level. In the past three years, the prices have shown an uptrend and have traded aboveUS$2,000 per tonne. The other factors for the variation in the price of aluminium in the past two years are price of crude oil which increased from $70 per barrel to over $100 a barrel and fluctuation of INR. The rising crude prices resulted in higher prices for its derivatives. The soaring crude also had a cascading effect in terms of higher transportation costs and higher prices of alternate energy sources like coal. All these led to a significant cost push for the aluminium industry. The depreciating dollar resulted in a sharp fall in domestic aluminium realizations as the prices are dollar denominated. Continuing with the stated policy of import duty reduction, the government cut the customs duty on aluminium. The effective import duty for aluminium declined from 8.1% to 5.7%. As a result of these macro economic factors, average aluminium realisations for FY08 declined sharply by11% as compared with FY07 realisations. CONCLUSION ChallengesAhead 1. A long-term decline in the real price of Aluminium will erode margins of the firms manufacturing primary aluminium. 2. Pressures to improve return on investment. 3. Maturing of terminal markets such as the London Metals Exchange (LME) as the firms are price takers and have little scope to decide the price. 4. Technological changes particularly on the upstream side. There has been no alternate method developed to extract metal from the ore.

5. Intense competition from other materials such as steel and plastics which are the substitutes to aluminium.

6. Need to respond to the changing demands of global customers, such as automakers and can manufacturers. 7. Reduce the consumption of electricity consumed in producing aluminium i.e. increase the energy efficiency. 8. Reducing the greenhouse gas emissions and PFC from the production process. Outlook The world aluminium market is expected to have a surplus of about 500 KT in the year 2008 due to the rapid increase in production activities and slightly lesser pace of growth in aluminium demand. The world aluminium production is expected to reach 40,400 KT against the expected demand of 39,900 KT in 2008 thus likely to affect the aluminium prices in the short run. The high energy prices are a major concern and may provide some support to prices in between or may also result in slight reduction in the anticipated surplus. In the long term, increasing demand from Asia might benefit aluminium price. Increasing income levels in India, for instance, are inducing higher demand from the automobiles and construction sectors, thus promising a better future for aluminium in the domestic market. REFERENCES 1. www.commoditywatch.com 2. www.metalworld.co.in 3. www.equitymaster.com 4. www.crnindia.com 5. www.nalco.com 6. www.hindalco.com 7. www.vedantaresources.com 8. www.indiainfoline.com9 . L o n d o n M e t a l E x c h a n g e W e b s i t e 10.International aluminium Institute website.11.Annual Reports of HINDALCO, NALCO and Vedanta (Sterlite Industries).