‘We will use railways more to bring down logistics cost’

16 February 2017

Suresh P Iyengar
The Hindu BusinessLine

The revival in aluminium and copper demand has come at the right time for Hindalco Industries which has just completed huge expansion. However, in the last nine months, the aluminium demand grew by just 1.6 per cent and that of copper was down by one per cent against double digit growth for both metals last year. In an interview with BusinessLine, Satish Pai, Managing Director, said the metal demand peaks in December and March quarters but the demonetisation has taken a toll in the last quarter and hopes are the March quarter will pan out well with good start in January and government spending on infrastructure. Excerpts:

What is the impact of demonetisation?
Year-on-year all our sales and LME prices were higher and input cost was lower, but if you see sequentially the aluminium sales was lower marginally and LME prices were higher. That is why our EBITDA was positive even sequentially. Aluminium prices on LME was $1,620 a tonne in the September quarter, while in December quarter it increased to $1,710 a tonne. Copper LME was also high now but what impacts us is treatment and refining charges which dropped compared to last year. Any upside in LME prices will go straight to bottomline with macros looking good, volumes holding steady and operational costs under control.

Do you expect metal prices to hold high?
Aluminium prices shot up on China plans to cut output by 30 per cent on environmental concern. I am bit skeptical about this theory. Every winter the pollution goes up in Beijing and Shanghai leading to announcement of cut in aluminium production. After winter, things are back to normal. In fact, some of the plants have restarted production in China after the price rise. In December, they produced 35 million tonnes (mt) and January numbers are yet to come. So the upside in prices is limited and the downside is cushioned by rising input cost. The bottom level I see is $1,600 a tonne, while on higher side it consolidated around $1,750-$1,850 level.

Will input cost stay high?
Rising input cost is a bit of a worry. With oil prices going up, carbon, furnace oil and caustic prices have risen, while coal in auction has also been creeping up. There is headwind coming in from input cost. With the monsoon approaching, the captive coal mines give us lot more security. When Coal India has production disruption during monsoon, other people have to import at high price, while our captive mines can supply at lower price. Our two underground mines will not be affected in monsoon. Except for the port-based Dahej plant we will not import coal. We use about 16 million tonnes of coal an annum.

What is the progress on reducing logistics cost?
Our logistics had gone up in November and December. We got struck badly for two months as the trucks could not pay for fuel after demonetisation.

In the December quarter, we could not do any improvement due to demonetisation. It was logistically an inefficient quarter. We are targeting to bring down logistics cost from 14 per cent of overall cost of production to eight per cent by moving more goods on rail. Out of 1.3 million tonnes of aluminium we ship out, 6.50 lakh tonnes is by rail. Annually, we get 32 million tonnes of raw material including coal, caustic and coal tar pitch into the factory. Of this, 15 million tonnes comes through rail.

We move roughly 50 per cent of our goods by rail and if I can raise it to 70-80 per cent then I can bring logistics cost down to 8-9 per cent of production cost. Rake availability remains an issue.

We have our own 11 rakes for moving alumina, but for moving coal and aluminium we need rakes from railway. But again companies like TCI and Concor are ramping up now. We would love to invest in rakes but are not allowed. Like coal mines, if they can allow some logistics company to run rakes for private sector companies, it will solve the problem.

GST is going to be the game-changer for logistics and large logistics companies will emerge after its implementation.