Bucking global trend: Hindalco, Nalco stick to output, expansion plans

ANALYST`S VIEW

When world aluminium leaders such as Alcoa of the US and the Aluminium Corporation of China (Chalco) reported massive drops in profits in the quarter ended September 30, in our country, the government-owned National Aluminium Company (Nalco) and AV Birla group flagship Hindalco managed to report increased earnings.

Alcoa had reported a 52 per cent fall in profit and Chalco as much as 92 per cent.

This is surprising when considered that in terms of capacity, Alcoa and Chalco are much bigger than their Indian counterparts, even after taking into account the expansion plans of the firms here.

Nalco Chairman C R Pradhan explains that what has saved the day for the integrated aluminium-maker is that it figures in the top 10 per cent column of world capacity in terms of cost efficiency. The same holds good for Hindalco.

“LME aluminium cash settlement price now at $1,966 a tonne is leading to closure of high-cost smelters in China and the US. Taking a cue, the more expensive alumina refinery is also being laid off to maintain a balance between demand and supply of the intermediate chemical. But don’t forget that in the last quarter, we also saw a high aluminium price of $3,291 a tonne,” says Pradhan.

The fancy price of $458.60 a tonne that Nalco got for one consignment of alumina sale in mid-July also cannot be overlooked. However, as spot alumina prices are easing, the Metal Bulletin of London reports that Nalco has received a top bid of only around $280 a tonne for its tender on long-term contract for 2009.

Like all other producers, rapid falls in metal and alumina prices since September are eroding the margins of Nalco and Hindalco. There is no doubt that as we go forward, we will see profits of Indian aluminium groups coming under increasing pressure. But their operational costs being so low, Nalco and Hindalco should not have the occasion to cut production.

Hindalco Managing Director Debu Bhattacharya says that even at current metal prices, the company remains in the profit zone and production cuts, therefore, are not contemplated. If anything other base metals will be faring worse than aluminium. Hindalco is on track to spread the fixed cost over a larger tonnage by bringing in new capacity on stream through brownfield expansions and debottlenecking of Renukoot smelter. In times of pressure on metal prices, this should stand the company in good stead.

The price behaviour on LME has obliged Nalco to cut aluminium prices by Rs 30,000 a tonne between July and October in instalments. Even then, had not dislocations in local coal supplies obliged it to make imports to take care of a part of the shortfall and also buy power from the grid as the captive power plants ran short of fuel, Nalco’s net profit for the third quarter would have been at least Rs 550 crore and not Rs 444.46 crore, claims Pradhan.

The main reason why Nalco and Hindalco are making some money even when the world is seeing a meltdown is due to their self-sufficiency in alumina and power. In recent periods, Nalco has found to its dismay that when it makes power using imported coal, the cost per unit comes to Rs 5.24 against Rs 1.68 when local fuel is used.

Power alone accounts for 30 to 32 per cent of aluminium production costs. We already have quite a few instances in China and the US where high power cost is proving to be a compelling reason for smelter shutdown.

Aluminium manufacturers say that in spite of the slowdown of the economy, the demand for the metal should continue to grow annually at around 8 per cent. That the power and electrical sectors will need more of this white metal is not doubted. But can this be said about automobile manufacturers or the house-building sector? Both are contending with demand recession and no one knows when the turnaround will happen.

Not only is our aluminium industry not contemplating production adjustment, a metaphor for capacity resting, none of the local producers is going to put on hold its capital expenditure plans. Nalco is preparing for another round of brownfield expansion to cost Rs 6,000 crore. Hindalco is not scaling down its aluminium growth plans either.