Competitors' envy

NALCO is the sole aluminium producing company in the public sector. The Indian aluminium industry is oligopolistic: the three main producers, Hindalco, Sterlite, Nalco, enjoy overwhelming market share. The barriers to entry are significantly high. This is mainly because the industry is highly capital intensive. The two competitors of Nalco have expanded by acquiring existing companies. While Hindalco had acquired another private company, Sterlite's acquisition of Balco significantly increased its capacity as an integrated producer of aluminium.

The last few years have been generally good for producers of industrial commodities, particularly metals. Prices have remained high and all the three main companies have registered high profits. It is well known in industry circles that both the Vedanta group, which owns Sterlite, and Hindalco, are eyeing Nalco.

The reasons are obvious. Nalco's access to high quality bauxite in Orissa (which accounts for 70 per cent of Indian bauxite reserves) gives it a phenomenal advantage. The access to good ore results in the company's cost of production of alumina being the lowest in the world.

What Nalco lacks is the autonomy required in an oligopolistic market to respond quickly and flexibly to the moves of its competitors. Its main problem has been in its inability to ramp up value addition. This is where companies like Hindalco have been successful.

However, this is not a problem that arises from being a publicly owned company. In fact, Nalco's efforts to introduce value-added products have been hampered by the extremely lethargic attitude of its owner, the Government of India. In 1991, the company sought permission, not money, from the government for investing in its expansion project. The permission came only in 1998, when Nalco's competitors had already entrenched themselves in the market. For instance, Nalco was unable to take advantage of the boom in the automobile industry, which resulted in a huge demand for wheels during the last decade.

The two competitors find Nalco attractive because it is relatively young, its balance sheet is strong and it is a low-cost producer of aluminium. If one of them succeeds in acquiring Nalco, the industry will become a duopoly, which will allow significant room for price gouging. The Aditya Birla Group, which controls Hindalco, has in the last decade focussed attention on the market for industrial intermediates. Most of the moves have come from the acquisition of existing companies. In the cement business, it acquired Larsen and Toubro's cement unit; in the aluminium business it acquired the Indian Aluminium company; it also acquired the copper business of the Indo-Gulf Corporation in 2002. Meanwhile, Sterlite acquired not only Balco but also Hindustan Zinc Ltd., which resulted in the overnight transformation of a public monopoly into a private monopoly.

The interest in Nalco that the two competitors have openly expressed in the last few years suggests that they are moving towards absolute dominance in the industry. This explains why Hindalco acquired a little over 1 per cent of the stake that was floating in the market after the last round of disinvestment. The 10 per cent disinvestment may appear nominal. It is anything but that.

V. Sridhar