Aluminium, on the London Metal Exchange (LME), has been falling since the beginning of the year. So has been the core earnings of Hindalco Industries and in turn, the profits.
The company maintains that its two businesses, aluminium and copper, complement each other well. D Bhattacharya, managing director, Hindalco Industries, says, "If the aluminium business is down then the copper business comes to the rescue and when copper prices are under pressure, aluminium performs well." This is true to an extent but the fall in profits caused by the aluminium business is not getting fully covered by copper.
Hindalco's earnings before interest and tax (Ebit), for aluminium, has been falling constantly since the first quarter of the current financial year. The Ebit share for the white metal has come down to 59 per cent at the end of the third quarter, as against a robust 81 per cent at the end of the first quarter. The aluminium prices on the LME has fallen from $2,603 per tonne to $2,091 per tonne in the given nine months. The Ebit share of copper has increased in the said proportion, from 19 per cent in the first quarter to 41 per cent in the third. Hindalco's net profit for the first quarter were Rs 644 crore, quarter two ended up with Rs 503 crore and in the third quarter, it posted a net profit of Rs 451 crore.
| UNDER PRESSURE Hindalco: Ebit-to-profit comparison | |||
| 2011-12 | Q1 | Q2 | Q3 |
| Aluminium (Ebit in %) | 81 | 74 | 59 |
| Copper (Ebit in %) | 19 | 26 | 41 |
| LME ($ per tonne) | 2603 | 2402 | 2091 |
| Total profit (Rs crore) | 744 | 576 | 526 |
| Data: Company and Emkay Research | |||
An analyst said, "Even though profits have been falling because of the fall in LME, we can see that the profits from the copper business has steadily gone up. The business cannot fully replace earnings from aluminium, but at least it is going up when aluminium LME is going down."
Copper segment Ebit rose by 51 per cent in the third quarter (year-on-year) to Rs 216 crore due to higher treatment and refining charges and by-product credits. Even though copper brings in more revenues for the company and has been increasing its share in the profits, it will continue to be lower than aluminium.
Ravindra Deshpande, research analyst, Elara Securities (India) Pvt Ltd said, "Hindalco has lined up robust capacity expansion plans in the aluminum segment. Going ahead, we believe, the successful completion of projects and start up of the key mines feeding the expanded capacities will be the key to the absolute Ebitda growth of Hindalco."
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Bhattacharya blames the falling LME for the given performance of the aluminium business. He said, "In April 2011, aluminium LME was around $2,700 per tonne and in December 2011, it was around $2,026 per tonne. This doesn't augur well. Indeed, this is a very difficult situation.”
Currently, the aluminium price on the LME is hovering around $2,100 per tonne. The cost of producing aluminium has been on the rise and the selling price for the metal has been on the constant decline.
Nearly half of the global production is at a cost of above $2,250 per tonne and close to a million tonne of aluminium production is already cut in the current year due to the falling LME.
Bhattacharya says he won't be surprised if there are more cuts in global aluminium production. Already, close to one million tonne of aluminium production is shut because of the falling LME.
In India, the situation may turn grim in the near future. Coal accounts for one-third of the aluminium cost and has been on the upswing since 2009.
Since December 2009, power costs to produce aluminium have gone up by 63 per cent. In China, the power cost have gone up by 25 per cent and the world average sits far below at 29 per cent. This has translated into the constant slippage in profits for Hindalco and the burden on the aluminium business. In the third quarter for aluminium, even though the net sales grew by 13.1 per cent, the Ebit fell sharply by 33.4 per cent when compared year-on-year.
Bhattacharya continues to maintain that the cost curve warrants a higher LME, something he has been talking since the beginning of the year. He also assures that the portfolio of aluminium and copper will help the company in difficult times.