National Aluminium Company, the country's largest producer and exporter of aluminium, plans to cut production in order to keep up with falling demand for the metal as its inventory levels peak.
Currently, the public sector major has an inventory of 20,000 tonnes as against the usual level of 5,000 tonnes. "We plan to cut production when our inventory level crosses 30,000 tonnes," said a highly placed executive at the company who did not wish to be named. Analysts expect the inventory to reach 25,000 tonnes by March-end.
After recording a high of $3,271 a tonne in July 2008 on the London Metal Exchange, the spot price of aluminium has dropped by 67 per cent to $1,251 a tonne in February 2009 following the credit crunch and the economic slowdown.
This decline prompted many aluminium makers, including the Vedanta Group-controlled Bharat Aluminium Company (Balco), to reduce output as the spot price was below the production cost.
The government-owned producer of primary aluminium, however, did not cut production. The company continued to sell about 60 per cent of its production, which are on long-term contracts and priced around $2,000 a tonne, while keeping the rest in warehouses.
Globally, inventory levels are rising to unmanageable levels. At LME, inventories have reached an all-time high of 3.45 million tonnes from the average of 1.2 million tonnes in 2008.
"We expect aluminium prices to remain below the cost of production for the next six to nine months," said Vipul Shah, an analyst with Mumbai-based brokerage K R Choksey Shares. "The outlook for aluminium is grim," he said
In an analyst conference call in February, Nalco said that its cost of production is around $1,500 a tonne, while its annual production is about 3,50,000 tonne. On Friday, aluminium was priced at $1,423 a tonne on LME.
"The cut in production is going to dent the company's profit as it would continue to incur the fixed cost, besides the set-up cost (restarting) is going to be substantial," said Shah. According to the analyst, 10-15 per cent of the production cost is fixed such as maintenance of the plant, staff cost, etc.
The company reported Rs 4,374 crore (Rs 43.74 billion) revenue for the nine months ended December 31, a growth of 11 per cent over the corresponding period of the previous year. It reported profit after tax of Rs 1,189 crore (Rs 11.89 billion), about 2 per cent drop over the year-ago period.
