The India aluminum paradox

Lower Production Costs

India is one of the cheapest countries in the world to make aluminum thanks to the government’s support of upstream producers, allowing them to double output since 2010. At the same time, aluminum prices in India are around 14 percent above London Metal Exchange (LME) prices, providing incentive for downstream aluminum users in India to import the material they need. LME aluminum prices have been falling of late, having peaked in April 2018 at $2,600 per ton and since sinking to the $1,800 per ton range. Prices have not crossed the $2,000 per ton mark since late October 2018.

So the picture that emerges from all this is of an India that is a low-cost producer of aluminum—making its exports attractive overseas—but not low-cost enough for domestic users who can find cheaper product abroad. Global trade turmoil is also making Indian aluminum more attractive overseas, including in the U.S.

These conditions have sparked calls by some in India’s aluminum industry for an increase in the country’s import duties on scrap and primary aluminum. Not surprisingly, domestic producers support that measure, seeking, as they see it, protection from low-cost imports. Downstream users of aluminum reject the notion of increased tariffs, desiring as they do cheaper aluminum.

The Commerce Ministry has taken up the cause of tariffs, urging the government to make it part of its industrial policy. The ministry is currently supporting a 10% rate on both primary aluminum and scrap—up from the current levels of 7.5% and 2.5% respectively.

Critics of the proposed tariffs say it will not make much of a difference in the imports picture, because half of India’s aluminum imports originate in countries with which India has free trade agreements—including Malaysia, Thailand, Vietnam, and South Korea. That percentage is likely to increase if the government succeeds in concluding an FTA with the Gulf Cooperation Council (GCC). Bahrain, a GCC member, is the world’s eighth-largest producer of aluminum, accounting for 10% of the country’s economy. The kingdom has been taking steps to expand its aluminum production, but has been hit hard by the Trump tariffs. The bottom line is that an increase in import duties would likely result in more imports from countries with which India has preferential trade arrangements.