The aluminium scene

ON June 15, 2000, the Union government invited bids for strategic partners for the sale of 51 per cent of its equity in Balco, the third biggest aluminium producing company in India. Balco, the government-owned National Aluminium Company (Nalco) and Hind ustan Aluminium Company (Hindalco) belonging to the A.V. Birla group together produce over three-quarters of the country's primary aluminium. Hindalco produces more than 40 per cent and Nalco about 34 per cent.

Balco's takeover by Sterlite is the latest in a series of acquisitions that have taken place in the industry in recent years. In February 1998, Sterlite made a bid for a stake in Indian Aluminium Company (Indal) but faced a strong challenge from its Cana dian promoter, Alcan. Although it bid only for a 10 per cent stake, it banked on the support of financial institutions and foreign institutional investors to sell shares in its favour. Market sources said at that time that the low price of Indal's scrip in relation to the value of the company's assets made it an easy target for a raider. Although Indal produces only 7 per cent of primary aluminium, it is known for its strength in the high-value downstream segment of the market. Eyeing the company's pote ntial, in March 2000 Hindalco accepted Alcan's offer of a 55 per cent stake in the company . With this acquisition, Hindalco's market share in primary aluminium production increased to 47 per cent. Hindalco also acquired a controlling stake in India Foil s, which belonged to the Khaitan Group. This acquisition was aimed at deepening its penetration in the downstream segment.

Nalco made its own acquisitions. It acquired 100 per cent stake in International Aluminium, which has an export-oriented unit at Angul in Orissa.

Earlier, Sterlite acquired Madras Aluminium Company (Malco), which had gone before the Board for Industrial and Financial Restructuring (BIFR). Although Sterlite has claimed that it has turned around the ailing company, critics point to the favourable te rms that it drew from the Tamil Nadu government, then headed by Jayalalitha, as part of the revival package. Power was supplied at a rupee a unit whereas other industrial units paid Rs.2.50 a unit.

Balco was incorporated in 1965 as the first public sector integrated aluminium producer. The technology for its smelter and alumina plants was acquired from Hungary and the Soviet Union. According to a former chairman of the company, now based in Delhi, one of its main strengths is that it is a vertically integrated company. This allows it to produce alumina from bauxite, refine alumina to produce aluminium at its smelter plant and manufacture a variety of finished products. Balco's workforce has also b een recognised for its commitment, as attested by the low incidence of strikes or work stoppages at its Korba plant.

Although the company enjoyed the benefits of a large integrated producer, these advantages were steadily lost in the face of technological changes that have changed the face of aluminium production worldwide. Power is one of the most significant inputs i n the production of aluminium, and the technological innovations in the business have invariably concentrated on the reduction of power consumption in the manufacturing process. Associated with this was the need for expansion of capacities to capitalise on the economies of scale they offer. The Union government's failure to allow Balco to modernise meant that it suffered even in comparison to Nalco. In fact, in mid-2000, a Standing Committee of Parliament had suggested the amalgamation of Balco and Nalc o as the "merger may provide sufficient corporate resilience to meet the challenges ahead".

At the height of the controversy over the government's disinvestment in the Gas Authority of India Limited in November 1991, it was suggested that a strategic sale, rather than a sale of government equity in the stock markets, would fetch the government a better price realisation. A strategic sale, it was argued, would draw only players who are really interested in the company as a business proposition and not speculative interests. However, even at that stage it was argued by critics of the privatisati on drive that a strategic sale may only result in the rise of cartels and the dominance of monopolies.

Industry watchers observe that one possible reason for the poor response to the Balco sale offer is that Hindalco is more interested in making a bid for Nalco, which is also expected to be sold later.

Sterlite's market share, which was a mere 3 per cent before the Balco deal, has now increased to more than 18 per cent. If Hindalco acquires Nalco, its market share will touch a whopping 82 per cent. Between themselves, the two companies would then contr ol the entire primary aluminium market in the country. The threat of cartelisation surely cannot get scarier than that.