Hindalco’s next phase of growth is going to be in downstream: Satish Pai
In Q1, the cost of production is going to be 3% lower, says Hindalco MD.
What affected Hindalco in FY19?
In FY19, the biggest story for us was the big rise in input cost of coal, of the carbon products as well as furnace oil and caustic soda. All these had a big impact in FY19. I am happy to say that in Q4, by February-March, we saw prices easing. For example, Q3 to Q4, our cost of production was flat but from March onwards, we are guiding that in Q1 the cost of production will be 3% lower. We are seeing some of the input costs falling, which would be beneficial going forward.
There was margin compression, but it was not as bad. Would you say that the LME management on Hindalco’s part played a role in capping the margin compression?
What benefits Hindalco in these times when LME goes down is twofold; one, we have a diversified business model because 25% of the aluminium we sell as downstream value-added products benefits us in times of lower LME because you get an additional EBITDA per ton from that.
We have a chemical business where we sell speciality alumina and hydrates which also benefits us. Third, 38% of our metal was hedged. All these three factors helped in reducing the impact of LME going down.
For Hindalco, a majority of its capex is done. In FY19, there was around 1295 KT of aluminium production. What is the utilisation level right now? What will you do for For FY20?
We are done with the upstream expansion and that was where Aditya, Mahan and Utkal, which involved nearly $5 billion (Rs 30,000 crore) of investment. We are starting on a new growth phase which has got two legs to it; one is downstream and involves aluminium and copper. We are today selling about 300 KT of the 1.295 million aluminium as value added. We want to double that to 600. We are selling today 245 KT of the 400 KT of copper as value added, we want to convert that to nearly 380, so nearly 90% is value added. So that is one leg of the investment.
The second is, now the alumina market is very attractive. We did a brownfield expansion of Utkal which is going to be completed and we may even expand further because we think that is a lucrative market. Our next phase of growth is already on the works and that is downstream and alumina.
Doubling the downstream capacity of aluminium. When will that come on stream?
From FY18 to FY19, we already increased 5%. This is the downstream expansion which is going to be modular. Over the next three to five years, you will see us steadily increasing our downstream capacities as well as going into higher value-added products. We are going to try to do both. Our goal is to get an additional $150 per ton of EBITDA 600 KT on top of the metal EBITDA that you get.
The Novelis results have been flying high. Would you say Novelis is already doing what you are trying to do in Hindalco, that it has more focus on downstream and that is giving it a leg up?
Novelis was a downstream company that we acquired and what Novelis has done very well is that it moved from just can and lower in specialities. They were the market leaders getting into auto sheet. Novelis has benefited because now it has a portfolio of very high-end FRP of can and auto, which drives the $418 EBITDA per ton.
As full owners of Novelis, we want to benefit from its technology and expertise in the downstream business model into India. In India, we have started with very low- end products over the last few years. We have been using Novelis’ expertise and getting our people trained. We are building another Novelis in India.
Currently, LME aluminium prices are at around $1,860. It has been quite a drop from $2,400-2,500 that it was trading at earlier. Do you think this is going to continue going forward?
The economies that matter for us from a consumption point of view are the US and China. The US economy has grown at the fastest rate of 3.2%. Last quarter, unemployment was at an all-time low. So, the US economy is very strong and a large part of Novelis’s EBITDA is coming from the US. The Brazil economy is doing very well which is very strong for us. The only worry we have actually is China.
China produces 50% of the aluminium and consumes 50% of the aluminium. If the Chinese economy slows down, then you are going to have the impact of a lower demand which will then bring prices down. Also, the Chinese will try to import more and that is why for us the big risk we talk about it is the Chinese economy.