In A Year Of Growth Hindalco’s Biggest Fear Is Dumping

Demand growth for aluminium and copper major Hindalco Industries Ltd. improved in the last three months and the prospects for financial year 2018-19 look strong, said the company’s Managing Director Satish Pai.

Almost all of the 9 percent growth in FY18 was witnessed in the December - March period. Copper demand rose 4 percent in the January - March quarter, after three flat quarters, ending the year flat-to-negative. “Indian demand for commodities really started to pick up in the last quarter,” said Pai in an interview to BloombergQuint.

Pai estimates 7-8 percent growth for the domestic aluminium business this year and 3-4 percent growth for the copper business.

The aluminium demand forecast is predicated on more business from packaging, transportation, affordable housing and infrastructure industries, besides mainstay consumer-electrical cables sector that’s only now showing signs of recovery. Globally, the electrical sector constitutes less than 20 percent of aluminium demand, and the bigger chunk is from housing and construction, Pai noted. India is also slowly moving to that mix. Domestic automobile companies will also soon be a big source of consumption.

“In India the SUV or crossover segment is growing the fastest. In those cars, if you have to meet emission norms of Bharat VI you have to lightweight them. And that is where the aluminisation starts.”

In copper, electrification is the main growth driver. And high-speed trains (150 kmph) are also expected to aid the recovery after a dull FY18. Copper is the smaller business, contributing a third of the company’s earnings before interest, depreciation, tax and amortisation.

Cost structures are also expected to hold for the next few quarters, Pai said, referring to coal, carbon and other inputs.

“The biggest problem in the business was the rising input cost. As a result of us being secure in coal and alumina and the fact that coke and pitch, which was the other input cost that was going up and we have now contracted it for the next 6 months, we see going forward the cost of production in the aluminium side has now flattened out. And we see an environment where the aluminium LME has started to go up and that’s going to be good for us.”

Global Price Outlook

Aluminium prices on the London Metal Exchange increased by over 20 percent over the last year, peaking at $2,600 per tonne in April when the U.S. announced sanctions against Russia’s Rusal, the world largest aluminium producer. Pai expects prices this fiscal to remain rangebound at between $2,200 - 2,300 per tonne.

Every $100 change in the commodity’s price has a Rs 600-700 crore impact on Hindalco’s EBIDTA, Pai said, adding that the company has hedged 30 percent of its sales at $2100 per tonne, in expectation of a strong commodity cycle.

“It’s an insurance policy. So if the LME price goes down, like in 2015-16 that hedging saved the profits of Hindalco.”

Copper prices are also expected to remain stable at the current $6,800 per tonne according to him.

The China Shadow

But casting a shadow on Pai’s forecast of buoyant demand and price stability is the fear of dumping by China’s aluminium companies. Imports now cater to 54 percent of total aluminium consumption in India, up from an earlier 52 percent. And while the increase may seem small, he said it was worrisome given the 0.5 million tonne per annum excess capacity in India. (Total industry capacity 4 mtpa)

There are signs of China-manufactured aluminium coming to India and local prices being hurt, Pai added.

“We have started to talk to the government and work with them proactively rather than reactively. I don’t think we need to wait for the situation to get bad and then react. We can probably take some measures like quantitative restrictions upfront.”

The aluminium industry association has already approached the government to avert a steel-industry like situation, when supply from China threatened the viability of local manufacturing a few years ago. Intense lobbying by steel companies prompted the government to resort to several measures ranging from higher duties to import price controls to curb imports.

Other Key Takeaways

Novelis is stable, its EBIDTA/tonne can be sustained, its automotive capacity is going up and it will be investing more in growth (organic expansions). It will probably add another line in Asia soon. The new Kentucky facility has broken ground and will take 20-24 months to complete.

Hindalco and Novelis, with their balance sheets strengthened, are now positioned to look at the next growth cycle. That growth cycle will come from organic means primarily but we will also consider inorganic growth where it makes sense.

No comment on reports of Hindalco looking to acquire Aleris.

Watch the full interview with Satish Pai here...