The demand deficit is becoming less... this should reverse by 2016: Debnarayan Bhattacharya

Interview with MD, Hindalco

Hindalco Industries, the flagship metal company of the A V Birla Group, is completing an ambitious $5.5-billion expansion to more than double its production capacity for aluminium to 1.3 million tonnes this year. But aluminum prices are going through a slump globally, as supply surpasses demand, leading to closure of high-cost operations. Yet, Debnarayan Bhattacharya, managing director of the $14.8-billion-turnover (Rs 80,000 cr) company, is not worried. Edited excerpts of an interview with Abhineet Kumar & Shubhashish:

When you embarked on this $5.5-bn capital expenditure in 2009, some assumptions were made and a lot has changed. What have become challenges now?

A lot has changed. Input costs have gone up. However, we had a certain rupee-dollar parity that has gone in our favour. What we had assumed at that time for the benchmark price at the London Metal Exchange (LME) is not much higher than currently. So is the rupee, so LME-wise, I am not surprised. We had hedged the dollar, so we pay what we had originally planned. There are some negatives but some positives as well. Overall, we will manage.

Would you have been happier if these capacities were to come, say, two-three years down the line from today?

No. At that time, we took advantage of the low cost for the capital goods. We have already sunk the cost, so we cannot hold on. We would like to ramp it up as soon as possible. The calculation that has perhaps gone a little awry is that we don't have coal availability.

What is the demand-supply gap for aluminium globally and when is demand expected to surpass supply?
As I speak, the demand is falling short of supply in spite of the very attractive growth rates in automobiles, can-body and speciality sectors. There is still a demand deficit but that is becoming less and less. By 2016, it is believed that there will be a shortfall in supply.

Why do I believe that? Because many production facilities are closing down as a large percentage of companies in China are losing cash. So are companies outside China. There is a limit till when these companies can continue to lose cash.

China has been the biggest consumer of the metal in the recent past. How is the demand scenario there?
I have visited China and I am almost paranoid about them. They are an absolutely unknown entity. You don't get to know what they are doing and far less of what they are going to do. They buy huge quantities of bauxite from Indonesia and India. Their energy need is also uneven. So, on the one hand, they are buying alumina or bauxite from the world and on the other hand, their power costs are going up. Third, the renminbi (Chinese currency) is hugely understated. If it appreciates, their earnings will come down but the cost structure will not.

But our new facilities will produce aluminium at one of the lowest costs in the world. China cannot compete with us. Even the old plants at Renukoot and Hirakud are producing at lower than the average Chinese costs. They (Chinese) are increasing production at a fast pace but are also shutting some plants. But net-net, China is still increasing its aluminium production. By the current demand growth, the world will need 61 million tonnes (mt) of aluminium from today's 41 mt. So, I am not too concerned about the market.

How is the India story?
Even better. India is growing at double-digits. But what is carrying that consumption is very different from the global consumption pattern. For instance, electrification is matured and complete in almost every developed market. Here, electrification is a big market and 40 per cent of aluminium in India goes to the conductor sector. Therefore, this growth will continue for at least seven-10 years more.

I don't expect growth from the automotive industry in India. We sell about 2.5 million cars a year but these are on the platform of value for money and whether aluminium will catch on is hard to debate. Those cars which are going to be exported will use aluminium. But the real growth will come from aluminium cans in beverages, both alcoholic and non-alcoholic.

What is the scope for the can market in India? What percentage of Hindalco's revenues can we see from the can-body segment?
There are already two big can makers in India, Rexam and Can-Pack. We will submit our product to them for inspection in July or August. I expect we should be able to do 100 kilotonnes (kt) in the next couple of years. Cans are also more profitable than many of our other value-added products. We are increasing our value-added products as a percentage and to improve our product mix.

So, in your aluminium segment, will can-body play a very major role?
That's right. The moment you supply can-body, you are an upgraded Flat Rolled Products (FRP) player. You are in a different league.

The first phase of this FRP can-body is 135 kt and in the second phase it will go up to 500 kt. Isn't that conservative?
We haven't embarked on the second phase. First, we would like to consolidate on the first phase and establish our capability. We are expecting the Indian market to get into a different trajectory. Once we establish our product in the market, we will move in the next phase.