Consolidation in aluminium

By Ramnath Subbu

MUMBAI, APRIL 1. In line with the global trends in the aluminium industry which underwent a major consolidation last year with giants teaming up with each other, the Indian industry too took a step in the same direction last fortnight when the Aditya Birla- owned Hindalco Industries snapped up rival Indian Aluminium (Indal) by picking up the Canadian partner Alcan's stake in the latter.

Alcan reached the decision to sell its stake in Indal after the global realignment in the industry and the subsequent refocussing of strategy.

Globally, Alcan with its partners - Algroup, which is already merged with Alcan and Pechiney which is to be merged later - has control of 16.1 per cent of the world alumina capacity and a surplus alumina capacity of only five lakh tonnes.

On the other hand, the Alcoa-Reynolds combine controls about 38 per cent of global alumina production and supplied 8.8 million tonnes in the third party market.

Already, there has been one round of consolidation in Indian when Indal acquired Orissa Extrusions and Annapurna Foils, India Foils acquired Light Metal, Century Extrusions took over Sangam Aluminium and Malco acquired India Foils.

Now, with the public sector aluminium companies Nalco and Balco up for privatisation, more consolidation seems round the corner.

The Hindalco-Indal deal, an all-cash deal of Rs. 738 crores, signals the formation of a mega player in the domestic aluminium industry. The acquisition price is fixed at Rs. 190 per share and Hindalco will not feel the strain as it has huge free reserves of Rs. 3,000 crores.

Hindalco announced the acquisition of Canadian major Alcan Aluminium's 54.6 per cent stake in Indal. It will also make an open offer for 20 per cent stake (14.22 million shares) in Indal, following the provisions of the takeover code. If fully accepted, the open offer will involve a cash payout of another Rs. 270 crores taking the total size of the deal to Rs. 1,008 crores. It may be recalled that Alcan had offered Rs. 200 per share to retain its control in Indal when a hostile bid by Sterlite was made in February 1998.

However, Hindalco cannot become complacent after the takeover. The public sector National Aluminium Company (Nalao) is planning a Rs. 2,000 crore expansion to increase its primary metal capacity from 2.3 lakh tonnes to 3.45 lakh tonnes with an addition of 120 MW captive power to take it to 840 MW.

Hindalco will benefit significantly because its growth has been affected due to the non-availability of additional metal volumes. Its brownfield expansion will give additional volumes only in the next 2-3 years.

Hindalco saves time on setting up a new greenfield venture to expand capacity. Besides, it will have access to value added products, a wider geographical area and a wider customer base.

The foils and sheets business of Indal will go a long way in adding value to Hindalco's portfolio.In terms of margins, Hindalco was better off because of its complete integration with access to captive power and primary metal. Indal outsourced up to 40 per cent of its requirement of primary metal giving rise to higher costs.

Hindalco's cost of power at 55 paise per kWh for its captive power is among the lowest while Indal was sourcing power from the grid at Rs. 4.56 per kWh against 75 paise per kWh for captive power.

The deal has also boosted Hindalco's export prospects. Through Alcan, Indal had made inroads into the export markets for alumina and semi-fabricated products.

It recently modernised its rolled products facility to bring it on a par with international standards. Alcan has also assured full marketing support to Hindalco. As per the deal, Hindalco has obtained a non-compete commitment from Alcan for three years, which may be extended by another two years by mutual consent.

Hindalco has a surplus metal capacity but insufficient alumina and downstream capacity. Indal is metal-strapped and has been resorting to duty-free imports to convert into downstream products. It has large alumina and downstream capacity.

After Hindalco's proposed brownfield expansion at Renukoot in Uttar Pradesh, the surplus in metal capacity will increase. Hindalco, which has a rolling capacity of 80,000 tonnes now gets an additional 90,000 tonnes from Indal.

Hindalco's alumina capacity is now around 3.50 lakh tpa and post- expansion this will increase by a further 2.10 lakh tonnes. It now gets control of Indal's alumina capacities as well which is 3.40 lakh tonnes. Indal too is in the midst of an expansion and post-expansion, its alumina capacity will be 7.10 lakh tonnes.

Thus, post-expansion, the combine will have a total alumina capacity of nearly 13 lakh tonnes. In primary metal, Hindalco has a capacity of 2.45 lakh tonnes and is expected to produce 2.51 lakh tonnes this year. Its brownfield expansion at Renukoot will see its metal capacity go up by 1.10 lakh tonnes.

Through the acquisition, it will get a further 45,000 tonnes and Indal is expanding its Hirakud smelter capacity by 30,000 tonnes by moving its potlines from Belgaum to Hirakud. Post acquisition and expansion, the combine will have a capacity of 13 lakh tonnes of alumina, 4.30 lakh tonnes of primary aluminium and 1.70 lakh tonnes of rolling capacity.

Indal also has a 20 per cent stake in Utkal Alumina, the joint venture with Norsk Hydro of Norway, Alcan and Indal for a one million tonnes alumina plant.

Alcan is keen on the $1 billion project. While Norsk Hydro holds 45 per cent stake in Utkal Alumina, Alcan has 35 per cent and Indal the remaining 20 per cent. With price increases in alumina following supply shortages, it seems Alcan is not likely to exit the Utkal Alumina venture. Considering the benefits to both parties, the Hindalco-Indal deal looks a strategic fit.

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