Headline

Healthy growth in demand for extrusions to continue in the medium term

Published On

Oct 20, 2010

Abstract
With increasing adoption of aluminium in housing, commercial and retail construction, we expect extrusions demand growth to remain strong at a CAGR of 9-11 per cent during 2009-10 to 2011-12.

Key Issues
- What are the demand drivers of the aluminium extrusion industry and what is their outlook for the next 2 years? - What is the profitability of players in the aluminium extrusion industry? -

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Aluminum extrusions industry

Introduction
In this section, we have concentrated on a downstream aluminium product extrusions. In continuation with CRISIL Researchs focus on downstream products, we have explored the entire value chain and estimated player profitability across the spectrum. In the following section, we have analysed the demand drivers, value chain and profitability of the aluminium extrusions industry.

Extrusions make up one-fifth of the downstream applications of aluminium

Primary aluminium (in the form of ingots) is cast into downstream products such as extrusions, rolled products, wire rods and castings, depending on its application. On the basis of production, 16-17 per cent of total aluminium ingots are further processed into extrusions (20 per cent by consumption of aluminium).

Aluminium downstream product mix

Source: CRISIL Research

Aluminium extrusion can be defined as the process that shapes aluminium, by forcibly making it flow through a shaped opening in a die. Extruded aluminium comes out as an elongated piece with the same profile as that of the die opening. Dies are made of high temperature-resistant steel and come in various shapes, sizes and levels of complexity. To make fitting and assembly more efficient, extrusions often go through some form of fabrication, including machining (cutting, drilling etc), joining (welding, gluing, bolting) and other types of value-added activities.

Architecturals: Major end-use application of extruded products

Aluminium extrusions are used in a range of applications across various end-use segments such as construction, transport, consumer durables and machinery. However, consumption of extrusions is heavily reliant on residential construction due its uses in architecturals like window frames, door frames, and curtain walls, among others. Aluminium window and door frames are predominantly used in commercial and retail construction. Over the last few years, they are increasingly being adopted even in urban residential construction, especially in sliding windows. The usage of aluminium extrusions in windows in the urban space has been rising steadily, replacing substitutes such as wood and stone. While a major share of extrusions is used in buildings, aluminium extrusions are increasingly being applied in automobiles. Extrusions are primarily used in the body of automobiles; however, they are also used in complex engine parts, tubes, grills and vents. Additionally, consumer durables, machinery and electricals also find application of aluminium extrusions.

Increasing use of extrusions in urban housing to drive growth of 9-10 per cent
The market size of aluminium extrusions as of 2008-09 is estimated at 350,000 tonnes. The architectural segment accounts for about 55 per cent of domestic extrusion consumption. Transport, electrical, consumer durables and other industrial applications make up the remaining demand. Domestic consumption of aluminium extrusion posted a CAGR of 8-10 per cent during 2003-04 to

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2008-09, largely due to increasing adoption of extrusions in urban household. In the said period, the increasing use of extrusions in automobiles, consumer durables and machinery due its low weight also contributed to overall growth.

Aluminium extrusions: Consumption pattern - India (2009-10)

Source: CRISIL Research

We expect the growth momentum in aluminium extrusions to continue over the next 2-3 years. Based on our short-term assessment of key consuming sectors, CRISIL Research expects the demand for extrusions to register a CAGR of 9-11 per cent during 2009-10 and 2011-12. Accordingly, the market size of extrusions will expand from 350,000 tonnes in 2008-09 to approximately 460,000-465,000 tonnes in 2011-12.

Demand outlook - aluminium extrusions

As the architectural segment dominates the overall consumption of aluminium extrusions, it is imperative to understand the demand for aluminium through architecturals. To project the demand for extrusion from the architectural segment, the following methodology was used:

Methodology to determine demand from architecture segment

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Source: CRISIL Research

Based on our in-house projections on expected floor space to be constructed in the housing, commercial and retail segments, we have arrived at total floor space to be constructed yearly. Applying industry norms (primarily through sourcing with industry players), we have arrived at consumption of aluminium extrusions. Our growth expectation in other sectors is in line with our in-house projection on growth in the respective sector.

Highly fragmented nature of the Indian extrusion market

Industry structure aluminium extrusions

Due to its relatively low capital intensity, the Indian aluminium extrusion industry is highly fragmented with more than 100 players operating in it. The two major players are Hindalco and Jindal Aluminium. Hindalco is an integrated player, while Jindal Aluminium purchases aluminium ingots from primary aluminium producers. These two players account for 20-25 per cent of the extrusions market. About 12-15 mid-sized firms such as Bhoruka Aluminium, Century Extrusions, Indo Alusys Inds Ltd etc. make up another 35-40 per 4 of 6

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cent of the total market. These firms primarily source aluminium ingots from primary producers and also use any scrap generated in-house for manufacturing extrusions. The rest of the market is made up of a number of small firms. These firms primarily use imported scrap instead of using primary aluminium. As these players are small in size and rely on scrap, they are unable to cater to OEMs or clients with niche requirements. They mainly deal with common alloys used in aluminium extrusion. Apart from its low capital-intensive nature, the industry is also characterised by low gestation period of 8-10 months. Even global markets are fragmented, with the top 3-4 players holding about 40 per cent of the market.

Industry dominated by non-integrated players

The extrusions industry can be largely divided into integrated players and non-integrated players. Integrated players have in-house production of primary aluminium, while non-integrated players source aluminium or aluminium scrap. Among the primary aluminium producers, Hindalco is the only player with forward-integration into the extrusion segment. So, the industry is dominated by non-integrated players.

Aluminium extrusions: Value chain

Source: CRISIL Research

Ability to cater to niche and quality-oriented clients a key determinant of profitability

The profitability of extrusion players depends on the nature of end product, niche clientele and quality. Integrated players benefit from their captive availability of aluminium ingot, captive availability of raw materials for ingot-making, captive power and also benefit from economies of scale. Being forward-integrated into downstream products, they are able to pass on higher realisations for end products and also build brands in the industry. Non-integrated players are vulnerable to fluctuations in the price of aluminium ingot, as they source ingots at prevailing LME prices. Additionally, competition is high in standard alloy products used in majority of window or door frames, thus exerting pressure on realisations of these standard products. Profitability of these players depend on diversity of products, niche products and quality. Typically, margins of these players are at 8-12 per cent and RoCE at 15-17 per cent.

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The profitability of non-integrated players who purchase scrap is also in a similar range. Although these players procure scrap which is cheaper than primary metal, their realisations are lower due to limited diversity in products and clientele.

Higher realisations to enable improved profitability in 2010-11 and 2011-12

In 2009-10, profit margins of both integrated and non-integrated players in the Indian industry dipped as compared with 2008-09, due to lower realisations of extrusions. Although prices of aluminum ingot also remained low, weak demand and low realisations led to lower profitability.

Profitability of players in the extrusions industry

In 2010-11 and 2011-12, the average price of aluminium ingot and accordingly, the price of aluminium extrusion, are expected to rise by 28-30 per cent over 2009-10. With growth in demand expected to remain healthy at 9-10 per cent, non-integrated players will be able to pass on the higher cost of aluminium ingot, while integrated players will be largely unaffected. In 2010-11, integrated players are expected to make a profit margin of 32-34 per cent, as their costs are likely to remain stable while realisations may surge by 28-30 per cent. In the same period, profit margin of non-integrated players will also improve by 200 to 300 bps to 8-10 per cent, benefiting from higher realisations.

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