december 6, 2011 d bhattacharya - 【2020年激安 ... trends...2010 2016 41 mn t 61 mn t. projected...

December 6, 2011

D BHATTACHARYAHon. President, Indian Aluminium Association

Managing Director, Hindalco Industries Ltd.

Vice-Chairman, Novelis Inc.

Changes in Business Environment

Presentation Structure

Global and Indian Consumption Trends

Trends- Challenges & Opportunities

2

Summing Up and Imperatives

Aluminium: Fastest growing metal

3

Aluminium has grown 12.7 times

while Steel 4 times, in last 50 years

___________________________________

Source: Updated from Barclays Capital

TinLead

Steel

ZincNickel

Aluminium

Copper

__________________________

Source: CRU , Barclays Capital

-

2.50

5.00

7.50

10.00

12.50

15.00

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

Gro

wth

Mu

ltip

le

TinLead

Steel

ZincNickel

Aluminium

Copper

Growth quickened in recent years

4

CAGR 2.7%

CAGR 5.0%

2010 2016

41 mn t

61 mn t

Projected Consumption Growth

CAGR

6.7%

_____________________

__

Source: Published reports

Trends in key country markets

5

Primary Aluminium Consumption (mn t) and CAGR (% p.a.)

18%

p.a.

10%

p.a.

0.5 1.0 1.50

0.20.40.60.8

11.21.41.6

2000 2010 2016 (P)

Brazil

7%

p.a.

7%

p.a.

0.6 1.6 2.90

0.5

1

1.5

2

2.5

3

3.5

2000 2010 2016 (P)

India

10%

p.a.

11%

p.a.

0.4 0.5 0.70

0.10.20.30.40.50.60.70.8

2000 2010 2016 (P)

Africa

4%

p.a.

5%

p.a.

6.3 4.2 5.30

1

2

3

4

5

6

7

2000 2010 2016 (P)

USA

4%

p.a.

4%

p.a.

0.8 1.6 2.60

0.5

1

1.5

2

2.5

3

2000 2010 2016 (P)

Middle East

8%

p.a.

8%

p.a.

• India projected to be amongst the fastest growing markets

• Return of growth in the US market projected

What is driving this growth?

6

World Aluminium Consumption Pie by End-Uses (2010,%)

Transport

Poised to gain from

light-weighting trend

Packaging

Potential to deepen

penetration

Consumer Durables

Rising middle class in EMs

Construction

Scope for material

replacement

Electrical

Infrastructure imperatives

of emerging markets

Machinery

Investment

growth-driven

Notwithstanding the present weak economic environment,

structural trends are in favour of aluminium

______________________

_

Source: Industry estimates

Per Capita Al. Consumption

7

Per capita GDP (USD)

Per

cap

ita A

lum

iniu

mC

on

s.

(kg

)

World average

8 kg

Even if India reaches half the world average by 2020, it would imply

aluminium consumption of 5.5 mn ton – or, >2.5x the current level

______________________

_

Source: IMF, Industry est.

Indian Market: Still Evolving…

8

India Aluminium Consumption Pie by End-Uses (2010,%)

Transport

Tremendous potential

due to auto growth +

deepening use

Packaging

Low base; scope to grow

Consumer Durables

Consumption story

augurs well

Construction

To benefit from urbanization

Electrical

Main-stay of Indian

market; reforms and

investment in electricity

sector key to growth

Machinery

Manufacturing policy

positive

Promising medium-term prospects for every user industry

______________________

_


India: Favourable Demographics

9

19

2628

3034

40

1980 1990 2000 2010 2020 (P)2030 (P)

Urbanization trend in India (%)

China’s urbanization rate moved from 30% to 40% during 1995-2005;

its Al consumption rose 4x over this period from 1.8 mn t to 7.2 mn t

______________________

_

Source: Research reports

India: At an Inflexion Point

10

Favourable demographics

Rising middle class

Working age population

Urbanization

Imperatives for

infrastructure investment

Goal to raise share of

manufacturing in GDP

Low base for Al

consumption

But Aluminium Value Chain will have to

navigate through several changes in the

business environment …

11





12


Trends… Challenges & Opportunities

13

Shifting trends posing new Challenges & Opportunities

‘Commodity’ - a

significant asset class

Cost pressures

Eastward shift…Recyclability

Light-weighting /

Material substitution

Sustainability

Trends.. Challenges & Opportunities

14


‘Commodity’ - a


Cost pressures


Light-weighting /


Sustainability

Bauxite Reserves – concentrated in

few countries

15

Australia,

23%

Brazil,

14%

Vietnam,

9%

India, 4%

China, 4%

2010 World Reserves ~23 bn

tons

Most potential lies in areas

perceived to have high political

risk

Based on expected growth in

mine production, China’s

reserves will last only for next

6/8 years

China exploring new

reserves both within and

outside

India: Local issues creating

difficulties

______________________


Natural Resource Challenges

16

Resource challenges : A

natural corollary to rising

demand & increasing

awareness

Falling grades

Incremental

resources in

difficult

geographies

Resource

nationalism &

heavier taxation

Clearances and

local environment

Relatively faster energy inflation

17

0

100

200

300

400

500

600

700

800

900

Ja

n-0

0

Ju

l-00

Ja

n-0

1

Jul-01

Ja

n-0

2

Ju

l-02

Ja

n-0

3

Ju

l-03

Ja

n-0

4

Ju

l-04

Ja

n-0

5

Ju

l-05

Jan

-06

Ju

l-06

Ja

n-0

7

Ju

l-07

Ja

n-0

8

Ju

l-08

Ja

n-0

9

Ju

l-09

Ja

n-1

0

Ju

l-10

Ja

n-1

1

Ju

l-11

Prices indexed to Jan 2000 = 100

Coal (Aus): 508

Oil: 399

Al: 130

___________

Source: IMF

Carbon Legislations getting more

stringent

18Adding to costs…

Carbon tax in Australia

Metal production cost estimated to increase by $250/ton by 2015

due to this factor

Larger offset requirements in Europe

Smelter closures expected in central Europe due to rising carbon

costs

Possibility of a ‘carbon import tax’ on products imported into Europe

China phasing out old smelters to lower emissions and power

consumption

Regulatory changes in India

Perform, Achieve and Trade scheme

Renewable energy obligations

Cost Curve moving up

19

Cash Business Smelter Cost (USD / ton)

Near-doubling of costs over the decade______________________

_

Source: Research reports

Capex intensity also on rise

20

Smelter capex intensity (USD / ton of aluminium capacity)

Long-run marginal cost estimates at around

$2,400-2,500/ton currently

0

1000

2000

3000

4000

5000

6000

7000

3,5003,900 4,100

5,970

6,757 6,316

~3,000

Ongoing / recently announced__________________________

__

Source: Compiled from reports


21


‘Commodity’ - a


Cost pressures


Light-weighting /


Sustainability

Alumina, Power & Labor form 80%

of total metal production cost

Bauxite availability key to

alumina production

Power costs decide new smelter

locations

Alumina, Power &

Labour are the

main components

~ 80% of total cost

Labour

9%

Carbon

10%

Power

27%

Alumina

43%

Others

11%

Alumina, Power &

Labour are the

main components

~ 80% of total cost

Labour

9%

Carbon

10%

Power

27%

Alumina

43%

Others

11%

Aluminium production shifting from the west to east

Rising power costs in the west

Alumina prices and logistics

Higher environment-related costs

Stagnating Demand…….22

New capacities : Asia to dominate

23

Shifts in production centres

China, Middle East and India to

account for >90% of capacity

addition during 2010-2016

11.0

2.4

2.0

1.5

0

2

4

6

8

10

12

14

16

18

2010-2016

Others

ME

India

China

______________________

_


Capacity addition (Mn tons)

16.9 World total

But each centre has few issues

to deal with …

24

India Good quality bauxite

resources and potential

for coal resources

? Tough local environment

? Delays in land

acquisition, clearances

China Local demand

advantage

Fast implementation

? Insufficient bauxite /

alumina

? High power tariffs, power

availability concerns

Middle East Cheap and abundant

energy? Non-availability of local

alumina

Region specific peculiar issues pose challenges…

New pressure points…

25

Structural appreciation of currencies in these production centres

Chinese Yuan up 30% in last six years

Indian and Australian currencies also have a structural

appreciation bias, though have weakened at present

_______________________________

_

Source: Pacific Exchange Database


26


‘Commodity’ - a


Cost pressures


Light-weighting /


Sustainability

Financing Deals

27

Financing deals creating a paradox…

Arbitrage window opened in 2009 …

Long-term

Contango

>Interest

rates

Storage

cost

Tight physical markets

despite huge inventory

0

1

2

3

4

5

6

7

8

9

10

Ja

n-0

7

Ju

n-0

7

No

v-0

7

Apr-

08

Sep-0

8

Fe

b-0

9

Ju

l-09

De

c-0

9

Ma

y-1

0

Oct-

10

Ma

r-11

Aug

-11

US MidWest ingot premium (c/lb)

______________________

_


Impact of Financial Investors

28

Ascent of commodity as an asset class

has induced several complexities

Fund investment in commodities

has gone up consistently …LME has become more volatile

2003-05 2006-07 2008-11

1.2

1.71.8

Std. Deviation of Daily returns on LME – Al. (%)

__________________________

_

Source: HDFC Sec, Bloomberg

Whither fundamentals?

29

Correlation of

LME with:1999-2004 Since 2004

Surplus / Deficit

during the period-0.37 0.05

Consumption 0.75 0.55

Stock-Consumption

Ratio-0.83 -0.39

_____________________

_

Source: HDFC Securities

Regression of LME on stocks ratio alone explains only 20% of

movement since 2004; Along with fund flow variable, 78% of movement

gets explained

Robust risk management systems imperative

for every player in the Value Chain

Inventory – LME relationship

30

Reported stocks (days)

Q3, 2011

Avera

ge L

ME

(U

SD

/to

n)

Q1,1999-Q4, 2008 Q1, 2009-Q3, 2011

‘Financing deals’ have vitiated the inventory-LME

relationship in recent years

_______________________

Source: Published research

Current LME way below marginal cost

31

Aluminium is the only base metal that is trading below

marginal cost at present …

When will LME catch up with fundamentals?

88 104

207

153

104Current LME

indexed to

Marginal Cost

($/t

on

)

_______________________

Source: LME, various reports


32


‘Commodity - a


Cost pressures


Light-weighting /


Sustainability

Why sustainability is crucial?

33

Remote locations ~ to remain close

to resources

Heavy energy-intensity; ~50% smelting capacity on

non-hydro energy

Generation of waste: red mud, fly ash, spent pot

lining, etc.

But aluminium has

capability to help

environment through its

applications and re-use

properties

Positive initiatives by the industry…

34

Energy intensity in smelting has

come down over years …

Also makes enormous

economic sense …

PFC emissions have reduced

sharply …

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

1990 2006 2010

>4

0.8 <0.6 0.4

PFC emissions (kg F/ ton of aluminium)

2020

objective_______________________________

_

Source: IAI, Aluminium Association

Addressing waste disposal challenges

35

Transformation of red mud pond at Belgaum using “bioremediation

technology” in partnership with TERI

Before Now

Addressing waste disposal challenges

36

Transformation of Fly Ash heap at Hirakud into an eco park


38


‘Commodity’ - a


Cost pressures


Light-weighting /


Sustainability

Leveraging Aluminium’s Recyclability

39

Green-consciousness likely to give a fillip to recycling in the

coming decades

Aluminium can be recycled

again and again without loss

of its inherent properties

Nearly 70% of aluminium

ever produced still believed

to be in use

Recycling requires only 5%

of energy and emits only 5%

of GHGs compared to

primary production

Share of recycled aluminium

has, however, stalled in last two

decades …

0

5

10

15

20

25

30

1970 1990 2010

~10

~28

~25

Recycled Al as % of total production

_____________________

_

Source: Beijing Axis, AAI

Recycling needs a strong infrastructure

40

Collectors

Dismantlers

Metal merchants

Scrap processors

Refiners and remelters

Converters

Role of Recycling uneven across

markets

41

Contribution of secondary aluminium in

total production (2010,%)

________________________________

___

Source: Beijing Axis, Industry estimatesRecycling intensity is a function of Market maturity, Consumption

profile, Recycling institutions and infrastructure; and R&D efforts of user

industry

Aluminium Can Recycling Rate

(2009/2010,%)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

US Europe Japan Brazil

58%64%

93%98%

Trends..Challenges & Opportunities

42


‘Commodity’ - a


Cost pressures


Light-weighting /


Sustainability

The Big ‘Auto’ Opportunity

43

Cars: 1 kg of aluminium

replacing conventional materials

eliminates 20 kg of CO2 over the

vehicle’s life

Railway wagons can use upto 5

tons of aluminium / wagon;

investment recovered through

fuel efficiencies in 2.5 years

Al already accounts for 60-80%

of aircraft weight; its use

deepening further

Aluminium is an asset for anything that travels …

44

0

100

200

300

400

500

600

1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

Po

un

ds p

er

Veh

icle

North America: Al content in Pounds per Light Vehicle- History and Forecast -

Driven by Castings

Driven by

Sheet

__________________________________________

__

Source: Ducker Worldwide and The Aluminum

Association, Oct. 2011

The ‘light-weighting’ phenomenon

Government regulations driving Al usage in auto industry

It’s a ‘win-win’ scenario

45

Aluminium’s advantage over steel in auto industry

Weight of the Mass of

Body-in-white (kg)

Fuel economy improvement in

Miles per Gallon (MPG)

_________________________

_

Source: Aluminum Association





46


Aluminium consumption poised for a bright

future …

47

Urbanization

Emerging

markets

Light-weighting

Earth-friendly

Growth will have its own challenges …

48

‘Financialization’

of LME

Resource challenges

Cost pressures

Carbon- and

environment-related

challenges

Most important priorities:

Securing resources

A continuous drive to

improve the cost structure

Enhancing sustainability of

operations

R&D focus on energy

efficiencies

Robust risk management

practices

Though Upstream industry seems to be under pressure at current

LME, markets will have to eventually catch up with fundamentals

But there are also interesting

opportunities

49

Recyclability

Light-weighting /


Focus on

sustainability in

auto/construction

Aluminium’s promise as ‘metal of

the future’ coming into play

Most important priorities:

Working with end-users to

develop applications that

would realize Aluminium’s full

potential

Recycling infrastructure and

institutions in emerging

markets

Focused market

development, especially in

emerging markets

Robust structural

prospects for

emerging markets

Downstream industry has to be proactive to leverage

favourable mega-trends

India: placed at the centre of the

unfolding aluminium story

50

Abundant coal and

good-quality bauxite

Infrastructure

imperativesRobust growth

prospects

India – at an inflexion point …

51

10%+ annual growth in consumption in the

years ahead

> Doubling of capacity in next 5 years

Immense potential to catch up with global

trends: packaging, light-weighting, green

construction …

All stakeholders must ensure that we do not fritter awaythis

enormous India advantage & derail the aluminium growth story

Thank you

52

december 6, 2011 d bhattacharya - 【2020年激安 ... trends...2010 2016 41 mn t 61 mn t. projected...

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