Prices of aluminium, which were hovering around $3,300 per tonne in July last year, have more than halved to around $1,450 per tonne. And it doesn’t look like the sheen’s coming back in a hurry. Inventories, which ranged between 0.61 to 0.91 million tonnes in 2007, are now at fifteen year highs of 28.7 million tonnes (source: Bloomberg).
Demand from China is flagging and USA’s largest producer Alcoa, which has cut production by 18 per cent in the past seven months, reckons demand in 2009 may drop 2 per cent over the one per cent fall in 2008. That could mean further production cuts. As a result, Novelis, Hindalco’s subsidiary, which caters mainly to markets in the US and Europe could stay in the red for a while longer.
That’s unfortunate because Indian producers are cost efficient; it’s just that current prices just about cover costs. Hindalco (stand-alone) posted flat net profits in the December 2008 quarter at Rs 545 crore helped by a higher other income. That’s despite better operating margins of 19 per cent — up 130 basis points — the result of better profitability in the copper division.
Sales were down 9 per cent to Rs 4,117 crore, better than the Street’s expectations — higher realisations from sulphuric acid and some smart hedging. Nalco was less lucky. Nalco’s net sales declined by 8 per cent to Rs 1,016 crore, while operating profit margins fell by over 1500 basis points to 24 per cent. The culprits: higher provisioning for staff costs as well as higher power and fuel costs. As a result, net profits dropped 33 per cent y-o-y to Rs 220 crore, despite providing a smaller amount for depreciation.