Financial Daily from THE HINDU group of publications
Monday, May 19, 2003
`Our showing will depend on market demand, global prices' Mr R. K. Kasliwal, Chief Financial Officer & Executive President, Hindalco
Shyam G. Menon
MUMBAI, May 18
HINDALCO Industries Ltd had a challenging 2002-2003. Its traditional aluminium production was hit by both low LME prices as well as power disruption, the company having to wait till the fiscal's fourth quarter to regain its tempo, which it did with record production.
On the other hand, Hindalco has changed from being a pure aluminium player, to a combination of copper and aluminium businesses. Financial year 2003 was the first full fiscal it faced in that form. Mr R.K. Kasliwal, Chief Financial Officer & Executive President, Hindalco, responded to questions from Business Line.
Last fiscal, Hindalco's revenues came 52 per cent from copper and 48 from aluminium, but its profits came 34 per cent from copper and 66 per cent from aluminium. Can you put this in perspective as the aluminium business was hit by both low LME prices and the power disruption of September 2002?
The share of aluminium and copper businesses in Hindalco's profits cannot be in the same proportion as its revenues due to inherent differences in the dynamics of the two businesses. Higher margins in our aluminium business are driven by the integrated nature of its operations, control over key inputs and a higher share of value-added products. The copper business, on the other hand, operates as a custom smelter. It is a high volume, low margin, high ROCE business where LME price is just a pass-through and margins are driven by the TC/RC levels. Thus, irrespective of the fact that the operations at the aluminium division were adversely impacted due to low LME prices and power disruptions, aluminium's share in the profits will continue to be higher than its ratio in revenues.
While speculation about the monsoon casts doubt on the likely quality of the domestic market in 2003-2004, major global economies are yet to recover strong. What does this mean for the domestic and export markets in fiscal 2004? Where do you see production levels in copper and aluminium?
Going forward, for aluminium the outlook is positive with expectations of stronger economic fundamentals despite the speculation about the monsoon. Our outlook for individual segments in the domestic market remains encouraging. The passage of the Electricity Bill and substantial allocations by the Government for power generation and transmission & distribution should gradually stimulate demand from the electrical sector. The building construction segment continues to be supported by lower interest rates and easy availability of financing while Budget 2003 has retained tax breaks for housing. The auto sector continues to be buoyant and should perform better with a stronger performance.
Both packaging and consumer durables should also receive impetus from a better agricultural performance. Hindalco can look forward to positive results from successful branding of its aluminium foil products and a substantially improved performance from the Alloy Wheel Plant.
In the international markets, the global recovery is proving to be elusive. For aluminium specifically, a return of consumer confidence is essential for segments such as transport and building construction which contribute in a large measure to overall consumption.
Until such time that this happens, concerns about the prevailing market imbalance and more inventory coming off financing deals will remain; consumers will buy for near term needs only and prices are unlikely to see any substantial increase. However, the long term fundamentals remain largely intact, inventories are not exceptionally high and in keeping with historical trends, aluminium should emerge quicker and stronger once better economic fundamentals become increasingly evident.
In copper, the domestic outlook is affected with the JFTC segment reflecting weak market conditions. The surge of imports from Sri Lanka also pose a challenge. However, domestic demand is expected to grow by 3 per cent.
Like aluminium, the long-term fundamentals of copper also remain intact but near-term global recovery is contingent on the US economy. The short-term demand picture in US and Europe, is foggy. However, the Asian demand, driven by China, remains healthy. The Asian demand-supply gap is in favour of Indian smelters.
In fiscal 2004, our goal is to produce 3.37 lakh tonnes of aluminium metal, an increase of about 27 per cent from financial year 2003 levels. Similarly, in copper we are aiming for a volume growth of over 20 per cent.
The fourth quarter of fiscal 2003 was Hindalco's best quarter ever in aluminium. Was that purely to compensate for the operational setbacks faced earlier in the fiscal or is the trend continuing into the first quarter of 2004?
In terms of production, the last quarter of 2002-2003 indeed was the best ever for aluminium. It was made possible by efforts to recharge the affected pots in record time. Further, the new potlines under the ongoing brownfield expansion were commissioned ahead of schedule. This helped in offsetting operational setbacks of earlier quarters. Our confidence of sustaining the trend of this margin recovery stems from several factors. First, the smelter operations have been fully stabilised. Second, coal supply problems have been largely resolved. Third, benefits from the ongoing cost reduction drives including an efficiency improvement exercise will begin to flow in the near term. The brownfield expansion, which is nearing completion, will drive volume growth and thereby lower the cash cost of production.
In other words, our superior performance in the fourth quarter was not a one-time achievement. We are confident that this trend is sustainable. However, going ahead, our performance and results will also depend on market demand and international prices.
Last year, despite the slide in LME prices, Hindalco's average realisation was protected by the higher share of value-added items in its overall product mix? What will be the share of value-added products in the current fiscal? What are the new value-added products Hindalco is looking at?
Our continued thrust on higher proportion of value-added products has enabled us to insulate ourselves from the fall in realisations to a large extent. This fiscal, we envisage a 27 per cent increase in volume of metal from brownfield expansion. The overall volumes of value-added products will also increase to an all-time high.
However, in percentage terms their share in our total sales is expected to come down this year as there is no corresponding increase in the capacity of value-added products. We aim to restore the percentage share of value-added products in our total sales to the existing level in the coming years.
Hindalco remains committed to increasing the share of value-added products in our basket of offerings.
In recent years, we have forayed into new product segments such as consumer products, roofing sheets, waterproofing applications and architectural segments. Going forward, we are eyeing new applications/products in transport and energy sectors where we see good potential. Development of new products and applications is an ongoing endeavour.
At an average metal production cost of $900/tonne in 2002-003, how does Hindalco compare globally on that parameter in the aluminium industry? What is the position in copper ?
Due to power disruptions on account of grid disturbance coupled with coal supply problems, our costs were adversely impacted. Our aim is to come back to the levels of $900 per tonne of metal through cost savings. At this level we will remain globally competitive. Eventually, we seek to secure our position among the top quartile of the globally cost-efficient producers of aluminium.
Similarly, our copper division ranks among one of the most cost efficient producers. This is on account of operating efficiencies. It also enjoys freight advantages by virtue of its location and by way of a captive jetty. Besides, it also enjoys value contribution from by-products like DAP (di-ammonium phosphate), and PMR (precious metals refinery).
Birla Copper has emerged as one of the lowest variable cost producers of copper in the world. The ongoing brownfield expansion will push it in the bracket of the top-20 per cent producers in terms of global cost structure. The copper division is also contemplating another low cost expansion, thereby aiming to secure a position in the top-10 per cent of global cost structure.
Can you explain developments on the copper mining front since Hindalco acquired two mines in Australia? Why is it likely to take two years to start copper concentrate supplies from there? In the interim, what is the outlook with regard to the price of concentrate imports?
The mines acquired by Hindalco are currently being mined for oxide ore on the surface. This ore is converted into copper cathode through a leaching/ solvent extraction and refining process. The mines also have a potential for sulfide ore, which requires mining and concentrate projects to be undertaken. Feasibility studies are being conducted now and the mining methodology is likely to be underground mining. The gestation period for such a project is approximately two years, hence, the concentrate of sulfide ore will be available for shipment to Dahej to be used in Birla Copper Smelter, approximately two years from now.
The price of concentrate imports is expected to remain tight during the year and the benchmark TC/RC will stay at low levels.
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