India aluminium duties come under fresh focus

India's aluminium sector has long been the focus of a regulatory tug-of-war, with the established primary aluminium industry and the smaller but more numerous producers of secondary metal lobbying for favourable import tariffs. Duties on imports of primary aluminium and its raw materials, as well as on secondary aluminium and scrap, exist in a kind of dynamic equilibrium that satisfies neither side. But significant changes to aluminium scrap trade flows have shifted the dynamic and could lead to significant action from Indian trade authorities.

India's scrap imports have been rising in recent years. As of the end of October, the country was on course to import around 1.37mn t of aluminium scrap in 2019, up from 1.29mn t in 2018 and 1.05mn t in 2017. In the first quarter of last year, India overtook China as the world's largest importer of aluminium scrap.

Already this year, the Federation of Indian Mineral Industries has asked the government to hike import duties for aluminium scrap in its next budget, claiming that low duties give aluminium scrap an advantage that allows secondary aluminium to compete unfairly with the primary industry. India imposes a duty of just 2.5pc on aluminium scrap imports, while duties on primary aluminium and its raw material imports stand at 7.5pc.

But such calls are often heard from India's primary aluminium sector, which is also calling for the government to raise duties on primary metal imports that compete with their own products, and to cut duties on aluminium-making raw materials. The Aluminium Association of India (AAI) said this month that customs duties on imports of aluminium fluoride, caustic soda lye and pre-baked carbon anodes should fall to 2.5pc from 7.5pc, putting them level with scrap imports.

The more fragmented secondary aluminium industry — which is comprised of thousands of small and medium enterprises against the big three of the primary metal sector — often calls for its own tariff recommendations. The Material Recycling Association of India (MRAI) said in a pre-budget recommendation to India's union finance minister this month that duties on scrap imports should be cut to zero — in line with product imports from nations with free-trade agreements.

But things could change this year with China's decision to restrict scrap imports ahead of implementing a new policy that reclassifies scrap metal as raw material and introduces strict new regulations on imports. India has become a prime target for previously China-bound deliveries of less clean scrap metal that cannot be exported to areas such as the EU, and scrap metal is taking an ever larger share of the aluminium market in India.

In the third quarter of last year, Indian aluminium scrap imports rose by 6.5pc on the year despite automotive production falling by 13pc. The vast majority of scrap metal imported into India has traditionally been consumed by the automotive industry, but these figures suggest that it is being used extensively in other applications as well. Depending on the grade, that could mean that alloying elements unsuited to these applications are making their way into, for example, power lines and other electrical appliances.

The AAI said that scrap metal now accounts for almost 60pc of India's total aluminium imports by volume.

As scrap imports continue to rise, calls for the government to address the situation will grow. If China's new policy leads to a long-term reduction in import volumes, India's current level of receipts could become a new normal. At that point, duties would be likely to be adjusted in favour of primary producers and in contest with growing scrap imports.

But India is in a difficult position in that it has a large, established primary aluminium industry dominated by the big three of Hindalco, Nalco and Vedanta, and a growing scrap processing industry that sells large amounts of secondary aluminium in international markets. But it has very little in between.

"India has huge primary production, but very limited downstream capacity," an analyst said. "It's a big scrap processor that's not able to benefit from the country's primary capacity because there is almost no domestic downstream industry. It's just producing and exporting raw materials."

Without an established downstream industry to link its primary production and its secondary processors, these industries will continue to deal almost exclusively with international customers and work against each other in domestic trade policy issues.