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"In brief, we do not worry about China in the near term" - Views on News from Equitymaster
 
 
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  • Dec 15, 2001

    "In brief, we do not worry about China in the near term"

    Having joined Hindalco in 1967, Mr. R K Kasliwal has grown with the company to become its Executive President and Chief Financial Officer. Mr. Kasliwal, who is a fellow member of the Institute of Chartered Accountants of India (ICAI), is also a member of the core management team at Hindalco.

    In another interview with Equitymaster, Mr. Kasliwal has given deeper insights into the fundamentals of the aluminium business. He goes on to argue the imperatives for future development of the industry and builds a case on why India, though being competitive, does not require lower primary aluminum import duties.

    EQM: Aluminium came out of the Russian overhang in the mid nineties only to be hit by the Asian crisis followed by the tech malaise spreading to other sectors. Do you believe that the cyclicality/volatility in business has increased? What are the reasons? What is the outlook for the aluminium cycle?

    Mr. Kasliwal:The volatility witnessed in the past decade underscores the global integration of markets. It is more than apparent that the days of economies prospering or going through bad times in isolation are over, and that the events in one market will inevitably impact trends worldwide. In this scenario, commodities too have had their cycles - and this includes aluminium. In short, the cyclicality witnessed in aluminium reflects the prevailing economic trends, which have impacted the entire commodity basket amongst others.

    Yes, there have been industry specific events, the breakup of the USSR did impact aluminium significantly by way of the abrupt and substantial flows of metal - so the events in Russia could be classified as exclusive to aluminium. But the same additional supplies are now an imperative in ensuring a supply and demand balance in the western world. Similarly, aluminium did weather the events in Asia and the resulting fallout reasonably well. Therefore, what is relevant to note is that aluminium has bounced back strongly from times of adversity.

    Today we again find ourselves in difficult times but these are not exclusive to aluminium. In our view, the intrinsic properties of aluminium - which are well appreciated the world over - will inevitably ensure a good outlook for this metal. We on our part are very optimistic that aluminium will emerge strongly from the current downturn once the fundamentals show signs of improvement. We base these views on the fact that the lean times that we have witnessed of late have discouraged aggressive capacity additions, sizeable capacities in North America are shut with no prospects of a restart in the near term and inventories are low - despite the recent accretions.

    EQM: What is the outlook for the domestic aluminium sector over the next one year? Investors are given the perennial argument of per capita consumption (PCC) numbers. In aluminium too, the inter-country disparity is large. PCC of India is an estimated 0.6 kgs while that of China is 2.7 kgs. Over what timeframe are we likely to match these numbers?

    Mr. Kasliwal:The fact that the per capita consumption of Aluminium in India is lower than that in China is very largely on account of the fact that China has identified the aluminium business as a priority area and made aggressive investments in the aluminium industry. In addition, a large part of the increased consumption in China is accounted for by infrastructure spending - in electrification and in housing in particular. These are priority areas for India as well. However hard industry works, the push for increased consumption will result only from substantial investments in infrastructure. This calls for an initiative by Government - either by way of Government spending or by creating conditions, which encourage investments in infrastructure. The low per capita consumption in India is also explained by yet another factor - the relatively lower consumption in rural India where a large part of our population of over 1 billion people reside. Again this calls for issues such as education and growth in incomes to be addressed - which again call for substantial Government initiatives. I am not trying to suggest that the entire initiative of growing consumption lies with the Government - industry must, and is doing its bit, by way of growing capacities and output as well as by way of improved diversity and quality of products. Industry must work for product as well as application development. What I am saying is that industry's efforts in isolation are likely to yield limited results.

    Looking to this situation it is hard to put a time frame to when India's per capita consumption will grow to levels existing elsewhere. Let me just say that with ongoing additions to capacity, the promotion of domestic consumption is one aspect that is receiving due attention from industry. The issue is, however, inextricably linked with the holistic perspective of overall economic growth, fiscal prudence and appropriate spending of the Government of India.

    EQM: The Finance Minister has spoken about reducing import tariffs to ASEAN levels. Currently, tariff on aluminium is approximately 30%, which is likely to reduce. Can the Indian majors compete with no or low import tariffs? What steps could be taken to cope with this challenge?

    Mr. Kasliwal:We believe that the reduction of duty to ASEAN levels is ill advised. The reason for import tariffs on unwrought aluminium in the ASEAN region being low is simply that there is no smelting capacity in the region other than one smelter in Indonesia. Secondary industry must necessarily import metal for value addition. So you have low import tariffs on metal but the Government ensures the interests of secondary manufacturers by having a higher tariff on wrought products. We have a lesson to learn from this - Governments the world over look to the interest of domestic industry.

    However, if import tariffs were to be reduced we have to evaluate our competitiveness vis--vis other world producers, where we score reasonably well. Yet, such a reduction of tariffs would inevitably result in pressure on domestic prices particularly during times when international prices are low - the volatility of prices is well known. On the whole, I would say that we are concerned about the proposal to reduce tariffs, yet confident in our ability to compete.

    EQM: With proximity to bauxite mines, captive power and economical human resources, is the Indian aluminium industry better competitively placed compared to developed nations? Could we see the shifting of aluminium manufacturing to Indian shores? How much of a threat is China?

    Mr. Kasliwal:When you view the cash costs of the Indian aluminium industry we are definitely competitive, and factors such as bauxite availability, coal for power generation and skilled yet economical manpower is playing a large role in this competitiveness.

    However, if you look at the aluminium business from the perspective of an investor, in terms of Return on Net Worth - the results are not so encouraging. This is largely because of the highly capital intensive nature of the Indian aluminium industry. To begin with, the very captive power plants, which ensure supply of power, are a compulsion, which add substantially to the capital costs. International producers do not have the compulsion to set up captive power plants. In addition, if you look at the cost of borrowings - the interest rates in India are significantly higher than those prevailing in the international markets. International producers also enjoy a distinct advantage by way of huge economy of scale. They also have assured access to inputs such as petroleum products at low cost. Indian industry must pay heavily for the technology it buys from the very people with whom it competes in the international market place.

    Given this scenario, particularly the high power costs, we do not see a shifting of aluminium manufacturing to Indian shores on a large scale. What we do see is brownfield expansions by Indian producers. Both Hindalco as well as Nalco are in the midst of such expansions, which will add 215,000 MTPA to smelting capacity in the near term. What you might see is investments in the less power intensive alumina-refining segment - several such proposals are being examined and worked on. So you might have Indian refineries producing metallurgical grade alumina for supply to smelters set up in areas where power is cheap.

    China's smelting capacity is comprised of almost a 100 smelters and it must source large quantities of alumina from abroad. At present, we do not view China as a threat. However, as I have mentioned earlier, the Government of China has identified the aluminium business as a priority sector and is working aggressively to promote this segment. There has also been talk of the smaller smelters being asked to expand. You have the recent happenings of Alcoa taking a stake in Chinalco. In brief, we do not worry about China in the near term, but we certainly have reason to be cautious in the medium to long term.

    EQM: Could you give us an update on the Rs.18 bn brownfield expansion, encompassing refining, smelting & power, at Hindalco? What is the financing pattern for the expansion?

    Mr. Kasliwal:Our brownfield expansion is progressing well and is as per schedule. We have commissioned our 9th potline of 33,000 tonnes per annum and we have had good progress with work on supporting facilities such as the alumina refinery and power plant. The expansion is being largely financed through internal accruals. Capacities are being expanded as under:

    New Capacity Expanded Capacity
    Alumina 210,000 MTPA 660,000 MTPA
    Aluminium Metal 100,000 MTPA 342,000 MTPA
    Captive Power 150 MW 769 MW

    EQM: Hindalco has embarked on a profitability exercise. What are the likely drivers of increased profitability? The company is amongst the lowest cost producers of the metal. Can costs be cut further and which heads are likely to be significant contributors to this endeavour?

    Mr. Kasliwal:The journey for cost efficiency does not have a destination - it must be an ongoing exercise. This is all the more relevant considering the fact that market prices are not determined by those who produce but by competing materials and customers. We hope to achieve significant gains through our ongoing structured cost cutting exercise. The exercise specifically seeks to cut costs through increased throughput, improved operating efficiency and reduced working capital cycle. We expect the exercise to yield benefits of the order of Rs. 400-500 m over the next 2-year time span. Further, the new capacities being added through our brownfield expansion will also result in substantial cost reduction through the adoption of new technologies and modification of processes.

    EQM: On a lighter note, any favorite books/personalities.

    Mr. Kasliwal:I admire and adore two illustrious business leaders, the late Mr. Aditya V. Birla and Mr. N.R. Narayan Murthy. I think, we all, in particular young entrepreneurs and business executives can get a lot of inspiration, guidance and lessons from their experience in establishing two great business groups - one of old economy and another of new economy.

    I have recently read two books, which I liked very much -
    Who moved my cheese - Spencer Johnson
    The Alchemist - Paul Coclho
    I am currently reading Jack: Straight from the Gut - Jack Welch with John A Byrne

     

     

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