The real steel: Curb aluminum scrap imports, provide a level-playing field to manufacturers

By Ansuman Das 

Any country that has abundant reserves of bauxite and coal has a comparative advantage in producing aluminium. India has fifth largest reserves of bauxite and coal, the key inputs. Aluminium is the metal of the future because of its versatility and high-technology use. As India gears up for the Fourth Industrial Revolution, a strong domestic aluminium industry is critical for growth. Remarkably, although India has built up sufficient capacity of primary aluminium (4.1 MT) to cater to domestic demand (4.0 MT), the industry is suffering because of a number of policy issues that affect its competitiveness. The government must address these.

The continued heavy regulation of the mining sector has meant that the country’s bauxite and coal reserves are not fully explored and mined. Ironically, for a country abundant in both raw materials, it is a net importer. The recent reform of the coal sector through an Ordinance will help. A similar expeditious approach is needed to bring in more bauxite blocks for auction. But there is a gestation period.

The country is currently importing 60% of its aluminium requirement despite sufficient capacity. Domestic producers are forced to export their material at lower price realisations. That global commodity prices, including those of aluminium, are subdued has only added to the challenge. The US-China trade war, which has resulted in these two economies imposing higher tariffs on aluminium and various restrictions on scrap imports, has meant greater dumping of aluminium into India and diversion of global scrap value chain towards India being a natural market for aluminium consumption. China has excess capacity in this sector. India cannot be a dumping ground for China-made aluminium, compromising its own economic security.

The other challenge to domestic industry comes from the import of scrap, particularly from the US and other advanced economies. Overall value addition using aluminium scrap is 4-5%, i.e. melting scrap and casting in other form/products. The primary aluminium production value chain entails 100% value addition from mining of ore to refining, smelting and further casting into various products, generating substantial employment at each stage. There are strong output and employment multiplier effects.

Curiously, amongst major economies, India is a rare one that imposes less duty on scrap (2.5%) as compared with primary aluminium (7.5%). China has a 14% duty on both primary aluminium and scrap. For scrap from the US, it is 25%. China is also imposing quantitative restrictions on scrap. Russia has a duty of 10% on both primary aluminium and scrap. In both cases, not only is the duty equal for scrap and primary, it is higher than the one levied on primary in India.

Of course, aluminium is a green metal and has the potential for recycling. But there must be stringent standards for what kind of scrap can be put to what use. Advanced countries recycle and utilise some of their domestic scrap and then dump the rest in emerging economies like India and China. The BIS must work on scrap because the consequences for environment and health are serious.

Low quality scrap with high lead content and presence of radioactive particles is particularly dangerous in consumer durables, and can cause serious problems in electrical equipment. Needless to say, India must work on creating an appropriate system for a circular economy that uses scrap generated within the country, as opposed to 100% imports of scrap of questionable quality, which leads to foreign exchange outgo of billions of dollars.

Given our natural endowments, the size of the domestic market and future potential, a thriving primary aluminium industry can be a major contributor to manufacturing and economic growth. The economic imperative is for the government to provide it a level-playing field.

The author is former CMD, National Aluminium Company

Source: Financial Express