Analyst Concall
Rising scrap aluminium cost to dampen Novelis EBITDA growth
This story was originally published at 23:07 IST on 6 November 2024
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--Novelis: New rolling, recycling plant in Alabama to begin ops Jul-Dec 2026
--CONTEXT: Comments by Novelis mgmt in post-earnings call with analysts
--CONTEXT: US-based Novelis is a subsidiary of India's Hindalco Industries
--Novelis: See FY25 capital expenditure between $1.8 bln and $2.1 bln
--Novelis: Expect to ramp up production by the end of 2025
--Novelis: Expect share of aluminium in vehicle making to rise in N America
--Novelis: See weak demand in Europe for vehicles affecting aluminium demand
--Novelis: See rise in scrap aluminium prices increasing production costs
--Novelis: Demand from South America recovering
--Novelis: Cost of procuring scrap aluminium rising in North America, Asia
--Novelis: Expect cost of procuring scrap aluminium to rise in Europe
By Avishek Rakshit & Jahanvi Kothari
KOLKATA/MUMBAI – Hindalco Industries Ltd.'s subsidiary Novelis Inc. is expecting a negative impact on its earnings before interest, taxes, depreciation and amortisation in the coming months as the cost of key raw material--scrap aluminium--is seen rising further. This comes despite the company’s projections of 4% on-year sales growth and healthy demand from key consumers.
In a call with analysts, the company’s President and Chief Executive Officer Steve Fisher said scrap procurement costs have risen sharply, which would lead to higher input costs. Novelis procures scrap aluminium and recycles it to make products. During 2023-24 (Apr-Mar), recycled metal comprised 63% of its manufactured products on average.
"With over 60% average recycled content in our products, higher (aluminium) scrap (prices) lessens the cost benefit we get from using scrap (aluminium) in our production process," he said.
The company cited intensifying competition for scrap aluminium, largely from liberalisation of scrap importation policies in China, as the key driver for the increase in scrap aluminium costs. The increase in such procurement costs is higher than what the company had originally anticipated, Fisher said. "Higher scrap prices with higher demand and unexpected input policy changes in China have accelerated the increase in scrap prices, driving them up higher and faster than previously projected," he said.
Scrap aluminium prices, which is a cost component for the company, rose sharply in North America and Asia, while it is still somewhat normal in Europe. Novelis, however, expects prices to go up in the Europe in the coming months. The company has already seen a production cost increase in its operations in Brazil as it recycles scrap aluminium bought in Mexico to feed operations in the Latin American country. Scrap metal prices in Mexico have been rising sharply.
The company’s adjusted EBITDA declined 5% on year to $462 million. It excludes a negative impact of $25 million from the Rhone river flooding at the end of June that hit production at its factory in Sierre, Switzerland.
However, the company is bullish on its top line and expects sales, which it terms as shipments, to grow by 4% on-year in the current financial year.
Demand for beverage cans has been very strong and is expected to remain so in the coming months, although the company is facing some demand headwinds from automobile makers from Europe. Demand for aluminium products from US-based automakers continues to remain strong, Fisher said, adding that the share of aluminium in vehicle making is expected to rise in North America. The demand for aluminium products from South America is recovering, he said.
The company is planning to ramp up production by the end of 2025 and has set an investment target of $1.8 billion-$2.1 billion to expand production capacity. Its new rolling and recycling plant in Alabama in the US is expected to begin operations during Jul-Dec 2026, Fisher said.
During Jul-Sept, Novelis reported a fall of 18% on year in net income to $128 million in the September quarter. However, the net income, after excluding special items, was $179 million, down 1% on year.
The net sales of the company increased 5% on year to $4.3 billion, and the volume of shipments of flat rolled products went up slightly by 1% on year to 945,000 tonnes.
Novelis manufactures and sells rolled aluminium products to the beverage, packaging, automotive, aerospace, and other industries, across North America, South America, Europe, and Asia. The company contributes more than half to Hindalco's consolidated net profit and over 60% to its consolidated revenue.
Wednesday, shares of Hindalco Industries closed 1.5% higher at INR 708.20 on the National Stock Exchange. End
US$1 = INR 84.28
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Deepshikha Bhardwaj
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