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China recovery bigger worry than EU carbon tax, Hindalco MD says

26th May 2023

By: Bloomberg

  

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The uncertainty over China’s economic recovery is proving to be a headwind for metal producers in the short-term even as the longer range demand outlook remains robust due to electrification and the shift to more sustainable metals, according to Hindalco Industries.

Aluminum prices have been pressured by worries that if the Chinese economy doesn’t pick up then any excess may be exported to the rest of the world at lower prices, Satish Pai, managing director at the Aditya Birla Group company, said in an interview with Bloomberg Television.

Hindalco, which owns US-based Novelis Inc., is among the largest aluminum producers in the world. It is India’s biggest copper producer and also has operations in fertilizers and chemicals. The firm exports half its aluminum output, mainly to Asia, with the US and Europe making for about 15% of shipments, Pai said.

The company continues to battle US import tariffs levied since 2018, but expects no major impact due to the EU’s Carbon Border Adjustment Mechanism, which comes into effect over three years. “The commercial impact of CBAM on any metal going from India to Europe is less than $50 a ton right now,” Pai said.

EDITED INTERVIEW EXCERPTS:

Has the China reopening been as you had anticipated?

From a macroeconomic uncertainty point of view, the strength of the Chinese economy post-Covid is a big unknown factor that’s having an impact on commodities prices. It’s not very clear whether the economy has picked back up, whether the demand for aluminum is as strong as what people expected.

Near-term demand and price assessment?

Fundamentally, supply and demand of aluminum is pretty tight. There is no surplus aluminum production in any large way. What people are actually worried about is since China is 50% of the production and 50% of the consumption, if the Chinese economy does not pick up will there be an excess in commodities like aluminum that will then be exported to the rest of the world at lower prices? That is the fear that is keeping some of the downward pressure on aluminum. If aluminum demand in China is strong, then prices can go much higher in the second half of this year.

Are you confident enough about demand to put some of the deferred investment plans back on the table? Last year, you deferred almost half the $8-billion proposed capital expenditure.

We have a couple of large projects, like the investment of about $2.5 billion for the Bay Minette project for Novelis Inc. and in India we have nearly $800 million in projects under execution. What we are going to do is let this year go and execute these projects. We will reassess the situation at the end of this year. We will come out with any other guidance in March on whether we bring back the capital expenditure or continue the way we are.

Your earnings presentation says Hindalco is pivoting from being a metals manufacturer to a solutions provider. Could you elaborate?

Let me give you some concrete proof points. The first one is electrification of the last mile vehicles. We have started to prepare aluminum boxes for these last mile vehicles that are coming up all over India. We have started to build aluminum buses, aluminum bulkers that carry cement, and aluminum rakes that carry coal and cement around the country.

We have started to do specific end-use projects. For example, we are building the battery enclosure for one of our major clients for their electric SUV.

The volumes are picking up. For it to have a substantial impact on a large company like ours will probably take a couple of years. If you look at our competitors in aluminum in India, they are all largely upstream players. We are the only people who are going more into the value-added side, in both aluminum and copper.

You’ve started supplying low-carbon aluminum. What’s the commercial scope?

There are certain automotive customers, can customers who want that low-carbon aluminum. So we are trying to cater to that customer demand.

Right now, the sales volume is a couple of hundred tons for this month. But, I think this year we’ll probably be shipping about 4 000 to 5 000 tons of low-carbon aluminum.

Impact of EU’s carbon tax?

In CBAM, electricity, which is scope 2, is not included right now and electricity is the largest part of carbon emissions in aluminum. The commercial impact of CBAM on any metal going from India to Europe is less than $50 a ton right now because it’s only dependent on the smelting operations.

Regardless of CBAM, I think that we are driven by what our customers and society want, which we believe is going to be more and more products with less carbon, but also more recycling.

Edited by Bloomberg

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