For primary aluminium producers in India saddled with humongous debt, shifting focus to value added products is the new buzzword, and understandably so. Volatile LME prices have eroded much of the margins of top producers like Aditya Birla Group owned Hindalco and London listed metal conglomerate Vedanta’s aluminium operations in India. Between them, the two metal focused entities have swelling debt portfolio of over Rs 1.4 lakh crore (approximately $US24 billion). Fighting a spate of low cost imports from the People’s Republic of China, both have taken a deep dive into their cost structure, with their boardrooms brainstorming ways to pare debt.
Hindalco’s new managing director Satish Pai, who previously worked with energy giant Schulemberger, has his task cut out for him. His next big focus is on value addition. Reason? Value added products are cocooned from the vagaries of metal prices and do not need much capital investment for a ramp-up. This makes huge sense for a producer looking to trim a consolidated debt of Rs 67517 crore (about $US 11 billion) and also increase its proven downstream capacities. Hindalco had the early mover advantage in the downstream portfolio when it acquired US-based Novelis in 2007. Hindalco’s subsidiary Novelis refinanced Rs 16,753 crore of debt in two tranches in August and September this year, helping it save Rs 362 crore in interest every year. It is now planning to sell its alumina refinery and bauxite mines in Brazil in an effort to trim its massive consolidated debt.
Next is Hindalco’s goal to raise the share of value added products to 50-60 per cent of its total sales in the next five years, from 30 per cent now. The company is targeting value added products in segments like electrical, building & construction, consumer packaging and transportation. Hindalco will be guided by its limited Capital Expenditure (Capex) of less than Rs 1000 crore (or a trifle over $US 1 million) per year. In the April-June period of this year, Hindalco posted 64 per cent year-on-year growth in EBITDA (earnings before interest, taxes and amortisation) from aluminium operations. Novelis whose focus is on automotive products logged growth of 22 per cent growth in shipments in the period under review.
Hindalco’s rival Vedanta is also aligning strategies by enriching its downstream business. It has gone for a disciplined ramp up of its upstream aluminium business with minimal incremental Capex. The conglomerate, which has over Rs 77,000 crore (around $USD 13 billion) of debt, has managed to cut debt by $700 million by the end of June. Vedanta’s recent merger with Cairn India is expected to bring in cash flow to trim debt further given Cairn’s cash rich balance sheet.
Vedanta is looking to grab a bigger portion of the automotive aluminium pie in India. Use of aluminium in the auto industry is still a fledgling market in the country and imports feed up to 65 per cent of all aluminium consumed in automotive components. But, Vedanta through process innovation, is designing new alloys that promise to cut dependence on imports from China and other countries. The aluminium producer is identifying and working on new imported substitute offerings to cater to the automotive sector.
Presently, Vedanta is manufacturing three types of automotive alloys- A356.2, LM25, and LM6. Vedanta has aligned its manufacturing facilities to support the requirement of the auto industry & indigenization of critical component manufacturing in the country. Vedanta is planning to set up a ‘Centre of Excellence’ in the automotive alloys market to produce new alloys that will improve the performance of the end products and give a boost to the ‘Make in India’ initiative by replacing imports and support expansion of downstream industries in the country.
Even state owned aluminium maker National Aluminium Company (Nalco) is under pressure from its parent ministry to focus more on value addition. Nalco has been exporting around one million tonnes of surplus alumina every year complaining that electricity cost in India did not encourage more aluminium manufacturing. Cost economics favours aluminium makers in Middle East, who exploit cheap gas availability.
The winning recipe: Shift focus from upstream to downstream
The time has come for Indian aluminium makers to wake up to the reality of dwindling demand for primary aluminium and the accompanying headwinds to this business. Volatile LME prices are hardly promising realizations for primary aluminium and cost of production for the makers is not falling to a level where their operations can compete with nations like China, Russia, Canada and the Middle East region. Low cost imports from China are also pouring into India, forcing the latter to idle 51 per cent of its aluminium making capacity. The best course of action here is for Indian producers not to join the charade for trade barriers and bans on Chinese unwrought aluminium and semi-processed products. They need to reboot their business model to strengthen the downstream portfolio.
Indian aluminium makers can learn from their counterparts in US, which strategically shifted to value added products after being stifled by growing imports from China. A classic case is Alcoa, which has spun off a separate downstream company, Arconic, to cater to the boom like segments like aerospace, automotive and packaging. Flooding of primary from China could be viewed as a big opportunity, especially for the downstream players to add value and expand their product portfolio. Be it global markets or India, the boom is in these emerging downstream applications. With its low per capita aluminium usage of 2.4 kg, India’s case for growth is even more robust. Aluminium consumption in India in FY16 rose 25.4 per cent, led by increased offtake in electrical, transportation and construction sectors. Exports by the primary producers also moved up 15 per cent year-on-year.
A sustainable model in the Indian context would be to develop viable ecosystems in the form of aluminium parks. The concept has paid off in the Gulf region and can be put to huge success in India where key ingredients like coal and bauxite can be found in a radius of 200 km. Aluminium parks, apart from creating a complete value chain, can also shave off energy, freight and inventory costs of $100 a tonne, providing opportunities for lean downstream manufacturing.