Global aluminium prices are under pressure and falling premium has hurt realisations of domestic producers. With the upstream business bearing the brunt of a sharp fall in realisations, Hindalco Industries is banking on its balanced business portfolio to tide over depressed price sentiments. Satish Pai, chief executive officer (aluminium), Hindalco Industries, talks to Jayajit Dash on the outlook on aluminium prices, Hindalco's assets, strategies to be cost competitive and its focus on downstream business. Edited excerpts:
What factors are triggering the plunge in aluminium prices?
The decline in aluminium prices, if you notice, is not an isolated case. The decline is across all commodities ranging from crude, iron ore, steel, copper, and zinc. Aluminium is no exception. Today, demand and supply alone do not determine pricing and financial institutions play a huge role.
This decline is primarily on account of depressed sentiments and risk averseness that has led to the strengthening of the dollar in the recent past. As a result, money is moving out of commodities as an asset class into a perceived safe heaven (dollar). This has led to a sharp plunge in London Metal Exchange (LME) prices. The reasons for falling prices are fears of the Chinese economy slowing down, perceived threat of hard landing, looming threat of the US Federal Reserve (Fed) increasing interest rates, general pessimism about global macro-economy with many parts not doing well, especially emerging economies. In case of aluminium, there is another significant component to pricing along with LME price, which is premium. In the recent past, premiums have also crashed from above $400 levels to $100 levels. This is hurting producers. This decline again was on account of pessimistic sentiments, change in LME warehousing rules and other factors that made financing trade of aluminium unviable, which resulted in release of inventory locked up, easing the availability of physical aluminium. So, the premium which was reflective of scarcity in the particular geography declined sharply.
Where do you see aluminium prices six months from now, and in the next one to two years? Do you sense any near-term recovery in prices?
As we talk, the premium that I described above appears to have bottomed out. They are increasing. LME also has recovered from its recent lows. All through this decline, the demand for aluminium continued to be robust, unlike other metals. Demand still growing at around five per cent annually means you need two Hindalcos every year to satiate demand. The issue has been supply, and that too, primarily, China. Outside China, there still is marginal annual deficit. I believe around 50 per cent of the smelters in China are under water at today's pricing scenario. Many Chinese smelters are surviving on subsidies by provincial governments. I believe the Chinese government is undertaking steps to cut pollution. China does not have enough domestic bauxite to produce aluminium and going forward, it will add to the cost as they rely on imported bauxite from places such as Guinea in Africa. An aluminium smelter once closed takes four to six months to restart - so many are still waiting and you will be witnessing some closures as pricing remains low.
There are hardly any operating smelters today in the US. So, I expect a supply side response soon and, hence, supply should peak out sooner than later. With a strong demand across the globe, prices should recover.
Global aluminium prices are still below the cost of production of primary producers in India. What strategies do they need to adopt to keep operations sustainable?
I cannot talk about all Indian players, but at Hindalco we have developed a balanced business portfolio that comprises a mix of pass through businesses, where LME is a pass through and upstream business (primary aluminium). While the upstream business is bearing the brunt of sharp fall in realisations, the copper business has performed creditably. Same is the case with Novelis as we move forward. So, inherently, we are better off. Our thrust on value addition, which differentiates us from many peers is our other strategy. We shall continue to develop market leading products and applications to enhance the aluminium usage penetration in India, which is abysmally low when compared to global norms. We continue to build on our solid foundation and strong presence in the value-added downstream segment. Today, our focus is on initiatives to drive down cost in all aspects of business. This includes cash conservation through various initiatives, including prudent working capital management, debt refinancing, improving operational excellence by ramping up of world class assets gaining efficiencies, judicious growth capex - screening for low investment, high return, opportunities that come on horizon - wire rods, billets and improving sourcing and logistics to bring down our coal cost.
Is Hindalco scaling back its expansion because of softening aluminium prices? What is your cost of production now and are you aiming to lower it?
No, on the contrary with the ramp-up of new smelters, we are increasing production. Mahan has completed its full ramp-up and Aditya is progressing very well with nearly 70 per cent of the pots in line. As these achieve full capacity, the cost of production (CoP) continues to decline. The CoP of new smelters is very competitive, improving and is in the second quartile on the latest global cost curve. Only at Hirakud, we have idled nearly 40 per cent of the old and inefficient potline and, thus, scaled back production to some extent. We are continuing with a modern and more efficient potline. So, overall, our production continues to grow. We have assets that are fundamentally very strong, with state-of-the-art technology. Utkal is amongst the world's lowest cost alumina refineries. We are focusing on efficiency improvements, optimisation of costs and more efficient logistics to bring down cost further. The business generates a decent Ebitda (earnings before interest, taxes, depreciation and amortisation). But, I do expect LME to recover from these levels. Our CoP is already on a downward trend. As we ramp up, our cost of production is expected to decline further.