Aluminium price to go up only if trade war is over and growth picks up: Satish Pai, Hindalco

The next quarter will be better than this quarter because the big impact of Muri will not be there. I think we will see better results in Q2, says Satish Pai, MD, Hindalco. Excerpts from an interview with ETNOW.

Aluminium prices have been coming down as has copper prices. Is that why you have shut down your Muri copper plant?
There has been a 21% drop in aluminium prices year on year. In case of copper, it was just a planned maintenance shutdown. So, it had nothing to do with the price of copper per se. For us, the downside has been the aluminium LME.

The world over some of the global aluminium majors as well like Alcoa etc, are either cutting growth forecast or are saying that the deficit would not be as large as we estimated it to be earlier which is obviously not good news again for aluminium. Do you think that LME aluminium prices could perhaps go lower from here or are we at a bottom?
The deficit is around roughly a million tonnes, largely coming from outside China. Now the reason why that deficit could get less is because if demand would get less. But why is demand going down? Demand is going down because the trade wars are having an impact on the economic growth. Chinese demand is down, European demand is down. The answer lies on whether the trade wars or the tariff war that is going on will get resolved.

The scenario for me is if they get resolved, then economic growth and demand will pick up because in case of aluminium, if you look at Novelis, we shipped 8% more. So, can demand be because of replacement? On auto, we shipped 4% more. There is quite healthy demand in electric vehicles and high-end SUVs.

At the specific end sectors we are not seeing a big demand going down where we play. We would like to see whether the economic sentiment improves and the overall price of aluminium is going up. That can only happen if the trade issues get resolved and the economic growth in China and the rest of the world pick up again.

Sentiment is not improving. With US terming China currency manipulator, some people are saying that we do not see an end to the trade war until the next presidential elections, which means there is no trigger as such for the sentiment of aluminium prices. What is your expectation and if aluminium stays where it is it would that mean more trouble for Hindalco?
No, if aluminium prices stay at the current $ 1,700-1,800 levels, then we are running at a 16% EBITDA level. We have the healthiest balance sheet among all the metal companies. We have a net debt to EBITDA of 2.69. We can weather this storm very well and we have Novelis which is doing extremely well and is not dependent on LME.

If things continue to be bad, then compared to our competition, we will outperform. It is anyone’s guess whether it will get resolved now or before the next election and we can all have our say. But is the company fundamentally prepared for dealing with the tough times? I think that is where Hindalco is differentiated because we have Novelis and the India business of aluminium and our cost of production is in the lowest quartile, our net debt to EBITDA is one of the lowest. So our balance sheet has the strength to go through these tough times.

Let us talk about the India business. Imports are grabbing a decent share of the domestic demand…
Much more than decent.

Firstly on the demand front, what are you anticipating and also how much of a trouble is imports for you then?
The good news has been that the Indian aluminium and copper demand has been quite strong this quarter. Aluminium demand grew by 7% and copper grew by 9% and so there is no problem on the demand side. The percentage of imports still continue to be 59% and that is really the cause of concern. For us, there are two sides to that import story; one is value-added products coming in from ASEAN and China and on the other hand, you have a lot of scrap coming in from the US.

It is very surprising that we are still importing so much scrap?
The scrap availability has gone up so much that scrap prices have dropped a lot. For many people, that is a very big positive arbitrage to bring in scrap and use at as substitution for metal. I think imports continue to be a concern and which is why the current ongoing negotiations of RCEP are very critical for the metals industry.

For your own production in aluminium, there was that Muri refinery shutdown. But Utkal Steel did better over there. If you could comment on the volume front?
What happened is that we lost. Muri does about 330 KT and we lost about 70 KT odd this quarter from Muri. But Utkal did about 30 KT more and then we imported the rest and that is how we managed. Now the good news is that we have finished cleaning up the red mud spill, we have done most of the preparatory work and we have applied for a restart which we hope will happen by September. So the worst is over for the Muri shutdown.

If I give your P&L a quick glance, there has been a sharp rise in the power and fuel costs. It is quite substantial. That is the only line item which is seeing a big jump on an year-on-year basis? Are you seeing that as a concern? Also, when you say power and fuel are you talking about coal and iron ore?
It is mostly coal. Compared to Q1 of last year, this year coal prices are higher but the positive thing is that on quarter-on-quarter it has come down. Our cost of production quarter-on-quarter has been down 3% and in the second half of this year, I will get another 3-5% down because generally input costs are coming down now.

What happens when it comes to margins? It is a commodity company and so it is difficult to do a bit of crystal ball gazing but if LME aluminium prices are where they are and if the cost of production has come down 3% from the previous quarter, can we expect some improvement in margins in the next quarter?
The next quarter will be better than this quarter because the big impact of Muri will not be there. I think we will see better results in Q2.