Expect cost pressures to ease from H2FY23: Hindalco MD

Aditya Birla Group company Hindalco Industries, one of the largest aluminium companies in the world, expects the September quarter to be the worst quarter in terms of cost of production, which is expected to show mid-teens growth. Managing Director Satish Pai in a post-earnings conversation with Moneycontrol suggested that it expects cost pressures only for the aluminium division due to higher coal prices and low availability. However, Pai expects some relief from the second half of the financial year. Edited excerpts:

Hindalco has recorded an all-time high profit for the June quarter. What’s behind this?

All the businesses of the company performed well.  Novelis (US subsidiary) had a record quarter with record net income, and record EBITDA (earnings before interest, taxes, depreciation and amortisation) at $580 per tonne. The Indian copper business also did extremely well and has started to fire on all cylinders. Besides, the aluminium business in India, both upstream and downstream, did very well.

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It’s for the first time that the company has split out the numbers and has listed downstream business performance separately. As far as the upstream business is concerned, even though LME (London Metal Exchange prices) had started to come down, coal costs have started to go up, and the company managed to do a fairly good performance with 38 percent EBITDA.

Where do you see maximum cost pressures of the three divisions—aluminium, alumina and copper?

The cost headwinds have only been affecting the aluminium upstream business. Novelis, copper, alumina and chemicals will not see a lot because in the Indian aluminium business the biggest impact is coming from coal, the rest are not as impacted by coal unavailability. We expect more impact of the cost inflation in the next quarter on the upstream aluminium business.

ALSO READ: What should investors do with Hindalco post Q1 results: Buy, sell or hold?

What is the cost escalation guidance for Q2? How is the e-auction premium stacking up for the ongoing quarter?

Costs went up by 17 percent in this quarter sequentially and are expected to witness another high-teens increase. The e-auction premiums have jumped nearly up to 500 percent in Q1 but have come down to about 300-250 percent. And we are hoping that it will start to come down more as more coal becomes available.

Talk about cost pressures in Q2 and the second half of the financial year.

We expect Q2 to be the peak and the worst. But we are already seeing signs of more coal linkages. So the prediction is that Q3 and Q4 will be much better than Q2. After Q2, the cost of production should start coming down.

Please explain the quantum and the levels at which hedging has been happening.

We have not hedged any further. We have hedged 30 percent aluminium at $2,500 per tonne.

What’s in store for the Novelis division? Hearsay suggests that a very major Novelis client has been cutting down on the capex plans…

We are fairly confident about the can demand in North America for Novelis. Historically, even if the market slows down, can demand normally has not really slowed down.  We remain fairly confident about shipment projections of cans for the rest of the year. Also, I think the $580 EBITDA per tonne achieved for this quarter is very high, and we expect it to be maintained at $525-plus.

A word on how you view the overall aluminium market? With so many supply-side adjustments happening across the globe, do you see some more supply adjustments taking place within India?

No, because the demand in India is pretty strong. So I don't see any curtailment of capacity. Profitability is indeed going to come under pressure. But one needs to remember that aluminium inventories are at all-time low levels worldwide. So people are going to take a slightly longer view.

Besides, lower LME prices are not a demand problem. Commodity prices are reflecting the macroeconomic uncertainties. And it's not just aluminium, it's any commodity. There seems to be concern about rate hikes, recession, China's economy slowing down, the Russian war, energy crisis… The number of uncertainties is clouding up the economic macro environment, which is what is keeping commodity prices subdued. This is nothing to do with the fundamentals of supply and demand. It's more to do with market sentiment.

Will higher Chinese production continue to weigh on LME prices?

The Chinese economy has seen the worst of the COVID shutdowns and is going to bounce back. China was importing aluminium at the same time last year. There was aluminium going from the rest of the world into China because they were short of aluminium. So these things can change very quickly, depending on the economic environment view. Would like to believe that the worst is over and the Chinese economy will probably show more strength in the second half of the year.

Where do you see the LME prices headed? Do you think the prices have hit the bottom?

Aluminium prices have corrected down to the $2,400 levels. And for the last couple of months, it's holding at that level. So I don't know whether that's the bottom or not, but I think you're going to see it range-bound at this sort of level until the macroeconomic situation gets clearer. So the best you can say is that probably it has found the floor, but now the ceiling remains to be seen.

What LME levels will prompt a supply-side adjustment from Hindalco?

It doesn't work at a spot level, people in the aluminium business do take a slightly longer-term view. One can't just shut down capacity and bring it back on. So aluminium prices have to remain low for over a year for people to take a drastic decision of shutting down capacities in India.

How much aluminium demand growth do you expect for FY23?

I think for India, going forward, we'll probably see an 8-9 percent increase this year versus last year.

Also, a word on any kind of firm measures that you're expecting from the government side?

All we need is Coal India should provide us with coal. That's it, everything else we can manage.