Impact of US Tariffs on Hindalco Industries and Novelis
Introduction
The announcement of a 25% tariff on aluminium imports by the United States has raised concerns in the global market. However, for Hindalco Industries Ltd. and its subsidiary, Novelis, this decision is estimated to have a neutral impact. Satish Pai, the managing director of Hindalco, shared insights about how this new tariff might affect the company.
Understanding Novelis and Its Operations
Novelis operates by processing both aluminium scrap and virgin aluminium to create flat-rolled products. These products are essential in various industries, including beverage production and aerospace manufacturing. The pricing strategy at Novelis involves passing the cost of aluminium onto customers after applying their margins. This means that when aluminium prices change, Novelis adjusts its prices accordingly.
Pricing Insights
According to Pai, aluminium prices are considered "pass-through" for Novelis. This term indicates that the company is effectively compensated for converting raw aluminium into flat sheets, primarily used in cans and automotive parts. The conversion process includes adding a premium charge for their services.
Impact of US Tariffs on Hindalco and Novelis
Hindalco, one of India’s leading aluminium producers, primarily focuses on the domestic market and has minimal exposure to the US. This limited exposure offers Hindalco a certain level of protection from the tariffs imposed by the US government.
Starting from March 12, the US will enforce a 25% tariff on all aluminium and steel imports, affecting many foreign manufacturers. However, Pai believes that the overall influence of this new tariff on global markets, including the London Metal Exchange (LME), will be minimal. Currently, aluminium prices at LME hover around $2,600 per metric ton, and Pai does not anticipate significant fluctuations due to the tariff announcements.
Positive Outlook for Novelis
Despite the tariffs, Pai maintains an optimistic outlook for Novelis. He emphasizes that the current US administration’s focus on bolstering domestic manufacturing aligns well with Novelis’s business strategy. Furthermore, the company has decided to postpone its plans for an initial public offering (IPO) in the US for at least a year.
As the fourth fiscal quarter approaches, Pai is hopeful for improved financial performance compared to the third quarter, during which Novelis faced challenges due to rising aluminium scrap prices affecting profit margins. However, he notes that the company is likely to witness increased profits moving into the new quarter.
Future Projections
Looking ahead, Pai projects a robust performance for Hindalco in fiscal year 2025, and indicates that if aluminium prices on the LME remain stable, fiscal year 2026 will also yield positive results for the company. He expects Hindalco’s upstream aluminium business, which produces primary aluminium, to continue its record-setting trajectory, further boosting the company’s overall performance.
Performance Highlights
In the quarter ending December 31, Hindalco’s upstream aluminium operations achieved notable financial success, reporting an EBITDA of ₹4,222 crore—a significant increase of 75% compared to the previous year. The downstream business, which focuses on value-added aluminium products, also showed impressive growth, with an EBITDA of ₹150 crore, marking a 39% year-on-year rise.
Conversely, Novelis experienced an 18% decrease in EBITDA during the third quarter, falling to ₹3,097 crore compared to the previous year.
Strategic Investments in India
In an effort to stabilize coal price fluctuations affecting its operations, Hindalco is making strategic investments in captive coal mines. Currently, about 10% of Hindalco’s coal needs are secured from these mines. Pai aims to increase this percentage to 90-100% by 2028, with plans to operationalize new mines located in Jharkhand and Odisha.
Conclusion
In summary, while the imposition of a 25% tariff on aluminium imports by the US could create ripples in the global market, Hindalco Industries Ltd. and Novelis seem to be in a sturdy position to navigate these changes. With a focus on domestic operations and strategic investments, Hindalco is poised for continued growth and resilience in the coming years. With these positive projections, both Hindalco and Novelis can anticipate a brighter financial future ahead.
