Blame the market and not the metal groups if they are going to distribute less by way of dividends this time in order to conserve cash in the present hard times. Similarly, much of their capital expenditure programme will be postponed to a future date. This has now become a universal phenomenon.
What alternative do they have at a time when they are experiencing a continuous fall in turnover and profit caused by the price setback since August. Moreover, who knows how far away the better times are. Our import duty on metals being small, developments in the rest of the world will have a significant bearing on the fortune groups like SAIL, Hindalco and Nalco.
Nalco’s profit in the third quarter of this year fell by more than half to Rs219.46 crore from Rs 445 crore in the previous quarter. Hindalco could show a marginal improvement in profit in the third quarter over the corresponding period of 2007-08, thanks to improved earnings from copper, where the concentrate conversion business model is proving to be a hedge against violent changes in the commodity cycle.
This financial year will soon be over and it requires no guessing that margins of these companies have come under further pressure in the final quarter. Hindalco is the country’s only aluminium producer to have continuously expanded its value-added product base. This has been done with the twin objectives of “de-risking the product portfolio” and expanding the market for the light metal in the country. Last year, Hindalco raised production of flat-rolled items to 215,198 tonnes, extrusions to 43,135 tonnes and foils to 25,700 tonnes. It also has a 300,000-piece capacity alloy wheel unit.
As a result, a major portion of the company’s primary aluminium production of 477,723 tonnes in 2007-08 was sold in value-added form. The market having hit the trough, even this model could not arrest the fall in Hindalco’s profit in aluminium.
The pitch was further queered for Hindalco in particular with the spurt in arrivals of aluminium sheets and foils from China, where producers are plagued by overcapacity. Imposition of the 35 per cent safeguard duty on sheets and 22 per cent on foils for a period of 200 days should curb oversupply and allow local producers to get better prices for their products.
New Delhi’s intervention in this case has been prompt and, expectedly, it did not invite any angry protests from China, which was indulging in dumping. The world aluminium market remains in a state of enormous oversupply and this is mostly on account of China. Last year, China’s share of the world aluminium production of 39.828 million tonnes was as much as 13.436 million tonnes.
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An important thing to note is that the world aluminium industry’s capacity utilisation in 2008 fell to 88 per cent from 92 per cent in the previous year as current metal prices and demand have led to the closure of high-cost smelters across all producing centres, including China. Nalco chairman C R Pradhan says as aluminium prices have been driven down to the current levels, half of the global industry is believed to be losing money on cash cost basis.
Both Nalco and Hindalco are counted among the lowest cost producers of the metal and they, therefore, have managed to stay in the profit zone. Vedanta Resources’ acquisition of 51 per cent ownership and management control of Balco in 2001 and the subsequently expansion of the Korba smelter by 250,000 tonnes to 350,000 tonnes by employing the Chinese Gami 320 technology, has changed Balco beyond recognition.
In fact, Vedanta has created the base at Korba to lift the aluminium smelting capacity to 1 million tonnes. No one will know it more than Vedanta chairman Anil Agarwal that the fortunes of Indian aluminium operations will be largely impacted by the global business environment.
What is not going to do aluminium any good is the 12.1 per cent fall in Japan’s fourth quarter GDP growth, which led World Bank President Robert Zoellick to say that we are in “serious and dangerous times”. If Japan, a market for 4 million tonnes of aluminium of which half is imported, is using less aluminium, it is bound to result in LME inventory rising.
Another point of concern is the alarming rate at which macroeconomic indicators for the Western world are deteriorating. However, the China Nonferrous Metals Industry Association, which is reconciled to aluminium prices staying below production costs for the rest of the year, says, “The room for a further fall in prices is limited.”
But in case of more reverses in prices, some high-cost production capacity – the major part of the world aluminium capacity is viable if the metal on LME stays above $1,600 a tonne – will have to “quit the market forever”. Whether or not aluminium is now due for technical correction, the message for Indian producers is to tighten the belt in every possible way.
Alcoa, the world’s second largest aluminium producer, is cutting dividend for the first time in more than a quarter century to save $400 million. The story may not be different here.