Domestic prices of aluminium, which surged to Rs 300 per kg in March 2022, are expected to gradually decline in the second half of this fiscal and average Rs 225-235 per kg for the whole fiscal, in sync with the global trend.

Domestic prices are linked to three-month contracts on the London Metal Exchange (LME), where the average price was $3,537 per tonne in March, up 8.5% on-month.

Despite the decline, CRISIL Research foresees the LME price averaging ~$3,100 per tonne in 2022, a good 25% higher than in 2021. The ramifications of the Russia-Ukraine conflict will be a monitorable, and can affect price movement going forward.

On February 23, 2022, a day before the war broke, global aluminium prices were hovering around $3,220 per tonne. On March 7, they rose to an all-time high of ~$3,985 per tonne after the conflict in Ukraine stoked concerns about supplies from Russia — at a time when there were production cuts in China and Europe.

Price have since retreated to ~$3,200 per tonne because a sudden surge in Covid-19 cases in China has brought demand to a standstill, leading to an inventory build-up. This has opened up an exports opportunity Chinese traders.

Once the regional lockdowns ease, excess inventory would hit the global markets and weigh down prices. But there is unlikely to be a sharp fall in prices because demand would continue to be good.

The global aluminium market saw a deficit of ~1.2 million tonne in 2021 due to lower output from China and Europe amid an energy crisis (aluminium smelting is an energy-intensive process), and a sharp recovery in demand as the pandemic began to ease. That compares with a surplus of ~1 MT in 2020.

Says Hetal Gandhi, Director, CRISIL Research, “Calendar 2022 will also see a supply deficit because of the extended supply cuts and robust demand globally, which will support prices. However, we expect the deficit to be relatively lower at ~1 MT versus 2021 because Chinese output should improve in the second half.”

In India, the average domestic price of ingots (the benchmark price for primary aluminium) in fiscal 2022 was ~Rs 226 per kg (ex-factory), a ~46% increase on-year.

The sharp rise has impacted domestic demand across end-user segments such as power, automobiles, and consumer durables, which are facing input cost surges. As a result, usage of secondary and scrap metal increased, which reduced demand for primary aluminium. Smaller buyers are preferring to import lower-priced secondary metal. To compensate, domestic aluminium makers increased exports.

Says Koustav Mazumdar, Associate Director, CRISIL Research, “Exports by domestic primary aluminium producers are estimated to be ~2.4 MT in fiscal 2022, tantamount to 61-64% of domestic production. While this is marginally lower than 65% in fiscal 2021, it is materially higher than the pre-Covid-19 levels of 50-55%. Record prices and buoyant exports have helped domestic smelters to scale up production to an all-time high last fiscal even as domestic demand remained sluggish.”