"Considering the steady GDP growth in India, I expect the aluminium industry growth rate to go up to 7 to 8% in near future," Mr. Satish Pai, Deputy Managing Director and CEO, Hindalco Industries, India

Mr. Satish Pai is the Deputy Managing Director and CEO of the Aluminum Business, India, Hindalco Industries. Mr. Pai is responsible for setting strategic vision for the Aluminum business of Hindalco in India. He also provides operational leadership in order to build sustainable competitive strengths and enhance shareholder value. AlCircle had the opportunity to speak to him during The 19th International Conference on Non-Ferrous Minerals and Metals in Bhubaneswar. He shared with us his outlook for the aluminium industry in India and Hindalco's strategy to overcome the current low phase in aluminium.

An Excerpt from the interview:

AlCircle: You are here to promote aluminium, the future metal for India. How would you justify this position for the industry considering the present low phase of aluminium?

Aluminium is the metal of the future, for India and the world. In comparison to carbon and steel, aluminium turns out to be a far superior metal when we consider density, thermal conductivity, electrical conductivity, recyclability or machinability and corrosion resistance that leads to superior life. Most of the things that we use or see today, starting from a beverage can to an aircraft, have aluminium in it. The unique combination of weight strength ratio along with its other qualities makes it the metal of choice for today's architecture, automobile, electrical, aerospace and packaging sector. In India, with the growth of the economy and urbanization, the usage of aluminium will be growing immensely in the building & construction and electrical sector.

Even as the demand outlook is very promising, I do feel that the global competitiveness of non-ferrous metal industry in India is coming under severe strain because of the developments impacting the cost structure. As a representative from the aluminium industry, I would like to convey the message to the government that aluminium industry, considering its growth potential, should be heard and given the status of a core industry.

AlCircle: Influx of Chinese aluminium products is posing a threat to all ex-China aluminium producers as the Chinese Aluminium Industry is being supported by the Government with power subsidy and a huge rebate on value added products export. Where do you see the solution to this situation?

Along with imports from China, influx of Middle East aluminium is posing an equal threat to any aluminium market, including India. Some of the imports are also happening under FTAs at zero duty. We do have a 5% duty on aluminium, but it is pretty low for the huge amount of import we have. Middle East too has an advantageous position because of low energy cost. The Gulf government is also trying to create employment and strategically diverting from oil and gas to aluminium while trying to be a net exporter of aluminium.

To withstand this situation, in the short term, we expect some amount of duty protection from the Government. Like they did it for steel, we want a raise in the import duty of aluminium products from 5% to 10%. Since we cannot do anything on the price of coal which is auction oriented, the government can promote the industry in other ways. We would also expect the government to calibrate its green initiative taking also into account the economic impact. We are not against environmental restrictions, but a more practical approach is welcome so that domestic industries can grow properly. The price of coal is going up like never before, at more than INR 4000 a ton (about USD 60) in the domestic auction market, local coal is no longer cheaper than imported coal. In fact, once you consider the burden of Renewable Purchase Obligation (RPO) and other green taxes and adjust for the calorific value, domestic coal can at times be more expensive than imported coal. And this cost is exclusive of the transportation cost.

AlCircle: In the recent coal auctions, Hindalco secured a large part of its Mahan and Aditya’s smelter requirements for coal. However, analysts say that the high bids might lead to higher input costs, considering the current and mid-term coal prices globally. We would like to know your opinion on this.

We secured the coal mines at a slightly higher price, with the objective of ensuring full ramp up of our new age smelters as it would allow us to get the benefit of technology and scale economy. More importantly, we looked at it like a portfolio. Considering the other sources of coal which were basically import oriented, it was at par with the cost of imported coal. We were ready to pay up to import parity. Secondly, the auction was for the coal mines which were already operational, which means, we were supposed to get the coal immediately so that we could ramp up the Aditya and Mahan smelters, which was a bit challenging with imported coal given the logistic infrastructure constraints. As a matter of fact, this actually serviced 25% to 28% of our total requirement.

AlCircle: The continuously low LME price and the rising input costs are making it difficult for smelters to continue operations globally. What measures are being taken by Hindalco to face this challenge?

We are now completely driven by our efforts to reduce the production cost of metal by our efficiency, like cutting down on coal consumption and other input costs. What we can do is to make our operational excellence the best it can be, because, we have no control on the market price. Nor can we cut down on the coal price. So, right now, to survive this low LME and low premiums period, we are cutting cost and ramping up our operational excellence to the maximum. We do hope the prices will improve, keeping the cyclical theory of metal prices in mind. We are also trying to leverage our play in the downstream operations, where profitability is not dependent on LME.

AlCircle: India's current per capita aluminium consumption continues to be one of the lowest in the world. With current 7% plus GDP growth and projected growth even higher, what is Hindalco's projection about aluminium consumption growth in India? As a premium Aluminium company, where does Hindalco see the growth of aluminium coming from?

People from the industry are talking about an 8 to 9% growth in aluminium in the coming years and I think it is possible to achieve that goal. If the economy grows at 7 to 8 %, you may actually see even larger growth in aluminium consumption, because aluminium growth is normally about 1.5 times the GDP growth and is typically faster than for other metals. Considering the steady GDP growth in India, I expect the aluminium industry growth rate to go up to 7 to 8% in near future.

With the revival of power sector, we expect a strong demand for Aluminium given the fact that electricity in India travels on Aluminium cables; with ~ 40% demand coming from this sector I see a strong growth prospect. The building and construction sector has immense potential for aluminium growth. Urbanization can truly boost the aluminium demand in India. If our Prime Minister's Smart City initiative comes into being, aluminium consumption will also come up considerably, whether in building facades or in electric lines.

In India, there is a big push towards indigenising Defence. If aluminium sheets and alloys are used for defence equipment, it will boost aluminium growth in a big way. We are in talks with organizations like Defence Research & Development Organisation (DRDO) and other organizations about utilizing our aluminium billets and sheets for defence. I have just come to know that finally the government is planning to make aluminium railway wagons which should boost aluminium demand in a big way. So, it is the Building and Construction sector, the Smart City projects, Electrification, Railways and Defence which can bring about a revolutionary change in the aluminium demand situation in India.

AlCircle: It is said that Novelis' performances have been instrumental in bolstering Hindalco figures. However, they too had low key earning results in the 4th quarter 2014-15. What is your view on this?

Novelis is actually moving on a steady growth path. Automotive demand is exponentially growing both in US and Europe which is mostly driven by the new CAFÉ standard. Can market is somewhat flat in US but growing well in Europe and Asia. The results of Novelis were a little soft in Q4 because of the fixed costs of new assets that are still to be fully ramped up, an unexpected hot mill outage in North America and sudden volatility in the premiums. The all-in-one price for aluminium is LME and Premiums put together. Suppose, Novelis bought aluminium in December to be used in a car in March, the dramatic drop in premium in those three months would definitely affect our earnings as premium, unlike LME, cannot be hedged. The premium volatility may continue to impact Novelis for another quarter but we expect the results to look up sooner than later, because Novelis is a pass through business as far as LME is concerned and the market growth is very strong. Novelis will sustain this period as they are very aggressive on their close-loop recycling and their prime market has been growing steadily.

AlCircle: As you know, AlCircle is an information and B2B portal for the aluminium industry and we aim to be the global reference point for aluminium industry players. As a professional from the aluminium industry, do you think e-commerce can work well in the global aluminium sector to make it more efficient, reduce cost and help producers to expand their reach and business realization?

It is clear that a large part of commercial trading is now taking place on e-commerce platforms. So, aluminium industry business is bound to be online at some point in time. As far as my knowledge about the aluminium industry goes, the trading is limited within a few big players like Glencore, Trafigura, Mitsubishi and TLG International. Most of the exports by major aluminium players go to these companies. So, I think, for any e-commerce portal to succeed in the aluminium sector, it has to get this handful of traders to operate on its platform.