Ladies and gentlemen, good day and welcome to Hindalco Industries second quarter FY 2022 earnings conference call. As a reminder, all participant lines will be in a listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star and zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Subir Sen, Head of Investor Relations at Hindalco. Thank you and over to you, sir.
Thank you. A very good evening and morning, everyone. On behalf of Hindalco Industries, I welcome you all to the earnings call for the second quarter of the financial year 2022. In this call, we will refer to the Q2 FY 2022 investor presentation available on the company's website. Some of the information on this call may be forward-looking in nature and is covered by the safe harbor language on slide number 2 of the said presentation. In this presentation, we have covered the key highlights of all our businesses for the second quarter of this financial year 2022, and a segment-wide comparative financial analysis of India business and our overseas subsidiary, Novelis.
As stated during our last quarter's discussion, the unallocable corporate SG&A expenses which used to be apportioned to individual business segments is now clubbed under unallocable expense or income in order to truly reflect individual business segment EBITDA in the Indian operations. The corresponding segment information of the prior periods have also been restated accordingly for a comparative analysis. We have with us from the Hindalco management, Mr. Satish Pai, Managing Director, and Mr. Praveen Maheshwari, Chief Financial Officer. From Novelis management we have Mr. Steve Fisher, President and CEO, and Mr. Dev Ahuja, Chief Financial Officer. Following this presentation, this call will be open to any questions you may have. An audio replay of this call will also be available on our website. Now let me turn this call to Satish.
Thank you, Subir. Good afternoon, good morning, everyone. Thank you for joining today's conference call of Hindalco's earnings for the second quarter of FY 2022. Let me now start with our progress for the first half of FY 2022 across various sustainability metrics on slide 5 and 6. On the environment, we continue to focus on water, waste, air emissions, and biodiversity. We have achieved 84% recycling and reuse of waste in the first half of FY 2022. We have achieved 90% bauxite residue utilization at three of our four alumina refineries in the first half. At Utkal Alumina Refinery, we are currently running several research projects to reuse the bauxite residue for mine backfilling and road construction. We are committed to 100% waste recycling in terms of all its waste.
On water, our freshwater consumption in H1 was 36.4 million cu m , with a continuous reduction in consumption of water at all locations over the years. Hindalco successfully achieved zero liquid discharge at 11 of its 15 sites, and is adding one site each year to achieve zero water discharge by the end of the year 2025. On green cover and biodiversity, in line with the IUCN guidelines, we have implemented biodiversity management plans at two of our plants and two mines. We have now started implementation at four more other mine sites. The cumulative green belt at all our sites at the end of the first half of FY 2022 is now spread over 4,909 acres. Coming to renewable energy and safety updates on slide 6.
Our assessment shows that the total potential of our on-site solar projects across all units is around 246 MW. We are committed to reach this year's target of 100. Mahan is being commissioned as we speak by the end of March 2022. Over the next few years, we have so far identified or in the process of finalizing an additional 96 MW of solar projects. We are targeting to reach 200 MW of solar by the end of 2025. We are currently exploring and evaluating emerging technologies in the space of energy storage, carbon capture and utilization, and hydrogen to be used as fuel. The specific energy consumption in aluminum was recorded at 82.7 at the end of first half of FY 2022 from the base year of FY 2012.
On safety, we are committed to zero harm and have been continuously upgrading our safety programs and systems to meet international standards to provide a safe environment for each of our employees and contract workmen. The LTIFR was recorded at 0.3 in the first half of FY 2022. Unfortunately, we had one fatality recorded of a contract workman at our Indian operations in the first half of this year. Coming to slide 8. Hindalco continues to deliver its best ever business and financial performance across all businesses, backed by improved macros, better operational efficiencies, higher volumes, and a strong market recovery. Novelis recorded quarterly shipments of 968 KT, up 5% year-on-year, and an EBITDA of $553 million, up 22% year-on-year on the back of higher volumes and favorable metal benefits.
EBITDA per ton stood at an all-time high of $571 per ton, up 16% year-on-year in Q2 FY 2022. Net income from continuing operations was at $239 million in this quarter, versus $144 million in the corresponding period of last year. Novelis successfully refinanced $1.5 billion unsecured senior notes with an annualized interest savings of $35 million in this quarter. Novelis continues to invest in the strategic organic expansion projects. In line with this, we recently announced a $130 million investment to enhance hot mill capacity by 124 KT and improve finishing capabilities for automotive sheets at Oswego, U.S. Moving on to Hindalco's India Aluminium business performance in Q2.
Our quarterly EBITDA for India Aluminum was at a record high of INR 3,247 crore, up 173% year-on-year. EBITDA margin was more than a decade high of 42% and continues to be one of the best in the industry. Aluminum metal sales was up 12% year-on-year at 338 KT versus 303 KT in the corresponding period, in line with market recovery. Value-added product sales were at 86 KT, up 36% on a year-on-year basis. I'm happy to share with you that our 500 KT Utkal alumina expansion project has started its commercial production and has already achieved its rated capacity during this quarter. This will take our total capacity of alumina at Utkal to nearly 2.1 million tons per annum.
Turning to the quarterly performance of the copper business on slide 9. Both our smelters ran optimally during this monsoon quarter. Our cathode production was at 100 KT, up 38% year-over-year, while the CC rod production was maintained at 65 KT in this quarter. Metal sales were at a record high of 110 KT, up 47%, while CC rod sales were at 70 KT, up 10% year-over-year. Copper EBITDA was recorded at INR 352 crores this year, up 45% year-over-year on the back of higher volumes, better operational efficiencies, and improved by-product realization.
You must have read by now that Hindalco has signed a definitive agreement with Polycab to acquire 100% equity stake in Ryker Base Private Limited , to increase the portfolio of our copper value-added products with a purchase consideration of INR 323 crore, subject to customary working capital/net debt closing adjustments. This is a ready facility with a capacity of 225 KT manufacturing cast and rolled copper wire rods. With this acquisition, our value-added CCI capacity shall reach 570 KT per annum. Coming to our quarterly consolidated performance. EBITDA was at a record INR 8,048 crore, up 56% year-on-year. Quarterly consolidated PAT for continued operations stood at INR 3,427 crore, up 92% year-on-year compared to INR 1,785 crore in the corresponding period last year.
Hindalco continued to maintain its strong treasury balance of around $659 million in Novelis and INR 13,748 crores in India at the end of September 2021. Net debt to EBITDA was below 2 at the end of September 2021, at 1.93 times versus 2.59 times at the end of March 2021. Turning to the broader economic environment on slide 11. As per IMF's latest estimate, global economy is expected to expand to 5.9% in calendar year 2021, after contracting 3.1% in calendar year 2020. Global economic recovery is gaining pace. However, pandemic outbreaks, climate-related disruptions in certain regions have led to supply shortages amidst a rising pent-up demand, which is ultimately feeding into higher inflationary pressures. This presents complex policy trade-offs, especially for policymakers who are cautiously normalizing the monetary policy.
Policy-induced slowdowns in China, as well as slow pace of vaccination in underdeveloped countries, pose downside risks to global growth. However, price pressures are expected to subside as supply chain shortages wane, signs of which are already visible. Global economic recovery will continue to be supported by vaccine administration and monetary policy actions. On the domestic front, India, after being hit by two COVID waves, is gaining pace in its economic recovery. High-frequency economic data has shown strong sequential recovery, indicating an uptick in both aggregate demand and supply. Mobility indicators have recovered quickly, almost reaching their pre-COVID levels. Going forward, continued vaccine momentum, along with effective monetary and fiscal support, will determine the strength of economic recovery. The IMF and RBI have maintained their GDP growth forecast for India at 9.5% for FY 2022.
Weakness in global growth momentum, rising inflation, and global supply chain disruptions could be key downside risks to this growth story. Let me now take you through the aluminum industry overview on slides 12 and 13. Year-to-date calendar year 2021, global production grew by 5% to 50.6 million tons, led by a 7% increase in Chinese production and a 3% growth in rest of the world. During this period, global consumption rebounded sharply by 12% to 51.5 million tons due to the low base, due to the low base effect. Chinese consumption grew by 8%, while rest of the world grew by 17%.
As a result, the global market was in a deficit of 0.9 million tons, with a Chinese deficit at 1.1 million tons, partially offset by a small surplus of 0.2 million tons in the rest of the world in the first nine months of calendar year 2021. In Q3 calendar year 2021, the overall world production expanded by 4% year-on-year to around 17 million tons, while consumption registered a growth of 5% year-on-year to reach 17.2 million tons, leading to a market deficit of 0.2 million tons. In China, consumption grew by 1% to 10.3 million tons due to significant headwinds from softer demand for internal combustion vehicles in the auto sector, which was on a continuous decline since May 2021 due to the shortage of semiconductors and also subdued building and construction demand.
However, the Chinese government's encouragement for EV and renewables, especially solar, is likely to support aluminum consumption. As the global markets remain in deficit with the improvement in global consumption, aluminum prices continued to grow by 10% to $2,647 per ton in Q3 calendar year 2021 from an average of 2,400 per ton in Q2 of calendar year 2021. Additional tailwinds that support strong aluminum prices includes accommodative monetary and fiscal policy, production curtailment on Chinese supply, leading to global deficits and low global inventories. Coming to slide 13. Domestic demand is likely to be at around 943 KT, 26% growth year-on-year this quarter due to the low base effect. However, if we compare sequentially, the consumption has grown by 4%. This is attributable to broad-based sustained recovery across almost all sectors.
However, the automotive demand softened due to semiconductor shortage, which also led to a 1% de-growth in scrap imports. Sequentially, the sale of domestic primary producers increased by 16% to 396 KT in this quarter. Going forward, with the record vaccinations and supportive policies, economic sentiments are likely to improve. This will help in a broad-based recovery across all sectors. The growth in e-commerce and onset of the festival season will continue to improve the consumption of consumer durables. Hence, if there is no third wave in India, Q3 FY 2022 aluminum consumption is likely to be higher than Q2 FY 2022 consumption. Moving to slide 14. The global FRP demand is expected to grow by 9% in calendar year 2021 versus a contraction of around 4% in calendar year 2020 on account of recovery in demand and the base effect.
The market demand for beverage can sheet continues to be strong and is estimated to grow by around 3%-6% calendar year 2021. The automotive segment is estimated to grow between 20%-25% in calendar year 2021 due to the base effect and continued revival of demand. The semiconductor shortage uncertainty continues to impact OEM production and auto sheet demand. The demand in specialties is expected to grow in the range of 5%-10% in calendar year 2021, with favorable housing fundamentals in the U.S. and Europe driving the strong D&C demand. In Q2 FY 2022, the domestic FRP demand is expected to grow by 34% year-on-year due to the base effect. Demand remains strong in packaging and consumer durables. D&C demand improved due to government projects. However, the auto sector faces some headwinds. Coming to the global copper industry on slide 15.
For the first nine months of calendar year 2021, the global production increased by 5.7% year-on-year, while consumption increased by 6.9% year-on-year. Year-to-date calendar year 2021, production in China increased by 9% and consumption by 5%, while the rest of the world production increased by 4% and consumption by 9% year-on-year. In Q3 of calendar year 2021, global production increased by 6.4% and consumption increased by 4.3% year-on-year. During this period, production in China increased by 7%, while consumption was flat due to lower physical demand on account of price volatility, spread of the Delta variant, and fears because of the Evergrande debt default.
On copper concentrate, due to subdued demand from the Chinese smelters, the spot quarterly TCRC in Q3 2021 witnessed an increase over the previous quarter to $0.146 per pound against $0.099-$0.10 per pound in Q2. The spot TCRC has now surpassed the 2021 benchmark of $0.154 per pound as labor negotiations in some large South American copper mines were concluded without any major disruption. The benchmark negotiations for 2022 is likely to be completed during the current quarter, and it's expected to be better than last year's benchmark. Coming to slide 16. On the domestic side in Q2 FY 2022, the overall copper market grew 36% sequentially at 160 KT versus 118 KT in the corresponding period of last year.
On a yearly basis, domestic demand grew by 7% year-on-year at 160 KT in Q2 FY 2022 from 150 KT in the corresponding period on account of recovery in demand. The current demand is expected to marginally drop in the month of November due to the festive season. In segments like D&C, railways, transformer, consumer durables, etc., demand is expected to witness growth while the automotive sector shall remain constrained due to the shortage in semiconductors. Now, the trend of the operational and financial performance for each of the business segments for this quarter, and that is the corresponding period of last year, are covered in the further slides and annexures to this presentation. I'm going to conclude by moving on to the three focus areas on slide 31.
Our focus on cost optimization and integration has helped the company to position itself in the first quartile of the global cost curve. Our primary focus remains stakeholder value enhancement. Hindalco continues to focus on profitable growth through its investments in recycling, debottlenecking and organic expansions in stable and predictable downstream businesses in India and Norway. The recent announcement of the Oswego hot mill expansion via debottlenecking and the Ryker acquisition in copper are some steps towards this. Hindalco's product mix diversification continues to help in enriching its product portfolio by increasing the share of high-end value-added products in the overall product mix to strengthen its position as the world's largest aluminum downstream company.
We also continue to focus on the ESG front, with the emphasis on the commitments we have made for 2050, while creating a sustainable, green, stronger and smarter world, and we strive to be called the most sustainable aluminum company in the world. Lastly, and most importantly, Hindalco is focused on strengthening its capital structure with a strong balance sheet by accelerating the pace of deleveraging through robust cash generation in line with its capital allocation framework. Hindalco's consolidated leverage today is below 2 at 1.93 at the end of first half of FY 2022. Thank you very much for your attention, and the forum is now open for any questions you have.
Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets for asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Indrajit Agarwal from CLSA. Please go ahead.
Hi. Thank you for the opportunity and congratulations. Two questions from my side. First, can you help us understand how much was the alumina sales this quarter, if there was any, and how does it look, you know, vis-a-vis with 1Q?
We had a 30 KT sale of alumina from Utkal this quarter.
Would have been nil or negligible last quarter?
5 KT last quarter. I think the pace of third-party sales is now going to pick up in Q3 and Q4 because we are now fully ramped up.
Okay. Thank you. I just want to actually understand the realization improvement, given the hedges and LME movement. It looks much sharper than probably what we have been expecting. Any color on that, any one-off or anything that we could factor in going forward, and what is the hedge policy?
Yeah, good point. I think let me give you. If you remember last quarter, I had said that our cost of production would go up by 5%, and it went up exactly, I think it was about 5.1%. We're in this quarter, in spite of all these coal shortages and other things, we managed to keep our cost of production under control. I think the second thing is, the operations were very steady. Logistics costs were under control because we managed to move lot more by rail rather than road. I think that's why overall we had a pretty good flow through on a good macro or LME environment.
Now coming to your point on the one time, yes, we had one time, which was about INR 130 crores of RoDTEP. If you remember, the RoDTEP finally got announced. This quarter we took INR 130 crore of the RoDTEP. I also want to remind you, last quarter I had told you that we missed 10 KT of sales from Q1 because of the late movement of the ship. If you look at the sales of 338 KT, 10 KT was that, the ship sailing on the first of July, which got recorded in this quarter. That extra 10 KT of sales is also there in the results.
Yeah. What is the COP guidance for third quarter? For what kind of inflation?
Third quarter, I think now we have done a fairly detailed analysis and, you know, it's going to go up by 8%. We are seeing a little bit more inflation there. On the other hand, we also would like to say that we are starting to see some of these tightness starting to flatten out. If you have looked at international coal prices, even freight, these are now starting to ease off. Probably Q3 may be a little bit of the peak, but we are starting to see these ease off now.
Sure. That's helpful. My second question is on the Ryker acquisition. As you mentioned, with this we'll have 570 KT of downstream. Our current run rate of cathode is about 380-400 KT. Will we be importing cathodes to cater to that? What kind of margins we can generate from this business?
Look, I think that, you know, besides our own cathode production, we always have what we call blister scrap. You're right, we also import, cathodes from Japan, to convert into copper rod.
Also, you know, we have signed up an agreement with Ryker to toll their requirements as well. Some part of this could be, you know, just tolling as well.
Sure. Any guidance on what kind of margin or EBITDA we could look for in this business?
We are not giving any guidance on EBITDA or margins for this particular activity separately. It's a strategic investment, and it will be value accretive for us going forward. You have to look at the business as an overall business itself, and this helps us in consolidating our position even more strongly in the domestic market.
Broadly speaking, it will be above that 15% ROCE hurdle rate.
Yes.
Yes. Yes. Absolutely.
Absolutely.
Okay. Thank you. That's all.
Yeah.
Thank you. The next question is from the line of Pinakin from JP Morgan. Please go ahead.
Thank you very much, sir. Sir, I have one question. It's not related to earnings. Broadly, if management looks at the aluminum environment at this point of time, very strong upstream, very strong downstream, and in a large part driven by what China has done in terms of decarbonization. Now, if China were to continue walking down this path, and logically from here, stop aluminum exports, and aggressively start importing aluminum scrap, they are setting up huge recycling capacities. Would the downstream business at Novelis be as resilient in that elevated scrap price environment, if we were to see China do that over the next 1-3 years?
I mean, and let Steve talk, but I'll give you one perspective. China is doing what I'm telling the Indian government should do more, in the sense that China actually has put restrictions on the type of scrap that can come to China, and is very aggressively promoting domestic scrap. Because now China is a large aluminum market, and they are pushing for more collection and usage of domestic scrap, to be collected and used in China. You all worry that, you know, U.S. or European scrap will largely go to China. China and actually even Malaysia have all started to push for more domestic and stop import of scrap coming in. Steve, do you want to add anything more to add?
No. Probably agree with you, Satish. I think around the world we're gonna see more circularity and recycling. Seeing flows of recycled content moving from one continent to another continent is just not gonna occur. You know, as scrap increases, the recycling rates in the bike for automobiles and everything else in other places, we feel very comfortable that we'll get access to that scrap at reasonable prices.
Just to push this point further. I mean, the worry, one of the worries is that, between, you know, ingots production and importing scrap, if China's priority is decarbonization, then it may look to relax the quality curbs on aluminum scrap it has put in over the last few years. If that were to happen, would you be as confident on scrap pricing and availability, or is it dependent on China continuing to keep restrictions on aluminum scrap imports?
Look, I think, Pinakin, this is fairly hypothetical to sort of look at that. We can only look at the actions of the Chinese government right now. Right now they're going through a shortage. They are importing, but they haven't really started to, you know, completely open the scrap market, et cetera. I do not personally believe. I think that Steve's point is that every country will be pushing to meet its obligations and will push for circular economy. China, for the last 10 years has been consuming half the world's aluminum. I think that, you know, they I expect them to really push for their own scrap to be now collected and reused.
Sure, sir. Lastly, sir, should Indian aluminum cost of production peak out in the December quarter given that coal prices, the tightness is easing out? Or do you see, cost of production to continue move higher given where general inflation trends is, into the fourth quarter as well?
I personally, that's why I think towards the first person's question, I tried to say that I am sort of seeing many of these peaks of seaborne coke, international coal, furnace oil, they all sort of have spiked up dramatically. They have all started to ease out now. I personally believe that it is probably going to smoothen out. I don't think it's going to go up dramatically from this point.
Understood. Thank you very much, sir.
Yeah, thanks, Pinakin.
Thank you. The next question is on the line of Amit Dixit from Edelweiss. Please go ahead.
Yeah, good evening, and thanks for taking my question. First of all, congratulations for a very good set of numbers. I have two questions. The first one is on cash flow. If I've seen from standalone operations, there is limited cash flow in H1 despite a very robust, you know, EBITDA generation. Largely it is due to working capital, particularly payables are down significantly. How do you see the way going ahead? I mean, do we expect this working capital to start unwinding from Q3, or we have to wait for a couple of more quarters?
No, I think, these, you know, the first half has seen a major increase in the LME. For India operations, copper LME becomes even more relevant because that's where we are buying and selling in copper. So really speaking, that is what has taken up the large part of the working capital blockage in the first half. Today the copper prices are more or less stabilized between $9,500-$10,000. Unless it moves up further from here, which we don't see, we are not likely to see any more blockage of funds in the working capital. So really speaking, we are not feeling bad about it because it's, you know, working capital is something which is very transitory. Today it has got blocked, but tomorrow when the LME comes down, it'll come out again.
We'll see a cash inflow coming in at that point of time. To answer your question, no, we are not seeing any further blockage from here onwards. Same is the situation with Novelis. Novelis is also unless, you know, aluminum LME actually moves up, we don't see any further cash blockage there.
Okay. The second question is essentially on coal mix. Last quarter, of course, we saw a fall in production, and we are seeing it this quarter also. If you can let us know your coal sourcing mix last quarter, and how is it likely to change in Q3?
The coal mix between linkage and e-auction was 96%, and our own mine was 4%. I think this average for the quarter hides the fact that in the last month of the quarter, when the whole coal shortage and the diversion of coal to IPP started, we actually ramped up our own mine quite a lot, which always is our swing producer. Now, the interesting thing for you could be that, you know, in Q2 to Q1, our coal prices on a rupee per million kcal were flat, which I think is quite a remarkable achievement, and this was largely because we were carrying heavy inventories going in.
I think in Q3, if you look at my guidance that 8% cost is going to go up, that's largely because now we have taken in more e-auction coal, and that coal price inflation is what we have built into that 8% for Q3. As a mix, I think it is not gonna change much. It's still gonna be largely linkage and e-auction.
Just a brief follow-up on this, but we are not facing any shortage of coal anymore?
No. I mean, let's put it this way. We were in some places tight, but, you know, we started the quarter with over 30 days inventory in coal. I think if you go and look at our working capital block at Q1, it looked a bit high because we were carrying a lot of inventory of CPC, pitch, coal. We do that as a routine before every monsoon quarter every year. We did not have any. We were not down to this, you know, one day, two days that you read. We were much better than that.
Great to know. Thanks, and all the best.
Yeah, thank you.
Thank you. The next question is from the line of Satyadeep Jain from Ambit Capital. Please go ahead.
Hi. Thank you for the opportunity. A couple of questions on sustainability. One is on the carbon capture. First of all, what you've done in bauxite residue is commendable and encouraging to hear thoughts on carbon capture and hydrogen. Firstly, on carbon capture, what kind of technology are you exploring for carbon capture? Did you look at different ways to utilize it? Have you explored whether you want to convert into urea? Have you done some kind of analysis on IRR on some of these projects?
Look, we are not in the IRR. We are in the pilot stage, and we are actually working with Shell and Technip. They have got a certain technology, and we are going to do a pilot in Aditya to try out how it works. I think that's about it I can tell you at this time. I just wanted to expand. You know, we have taken a net carbon zero at 2050, so we are building a model. Our model means that we are experimenting with quite a lot of technologies. We are trying to look at hydrogen as well. We are starting to look at buying renewable power from the large power suppliers in India because they have started to offer renewable power at about 80%-85% load factor.
There's a number of things that we are trying, and we are experimenting to get down that carbon chain.
Okay. On that, follow-up to that experimenting new technologies, two large global peers are now talking actively about inert anode technology, and one of them is actually saying they might start licensing it in a few years. I know it's still too early, but has the management explored the possibility of retrofitting the current smelters with some of these technologies? That would mean licensing these technologies from others. Why I'm asking this is maybe in a couple of years, so other companies may start adopting it. Then, given the Indian smelters have high CO2 emissions, the pressure might be there on the Indian smelters to also start licensing, even though we have net zero carbon emissions way down the road.
Related to that would be, would the company maybe try to optically it seems based on what we are hearing from others, global peers, that they are ahead of on the technology part. Would Hindalco also look at increasing R&D on some of these new pathbreaking technologies so that in future we don't have to license it from others, and we can, Hindalco can adopt its own technology.
First, on the last point, we have patented a copper inserted collector bar technology that is now being bought by some of our international competitors from us. We have already started to ramp up our R&D and projects for smelter technology. Now, on this inert anode, you have to realize that this is a project that's been going on for the last 20 years. This ELYSIS technology that you are talking about, Alcoa and Rio Tinto have been doing. We have been monitoring it. I wanted to tell you that there are other such technologies on inert anodes that are going around. We are also experimenting with some of them. In the broader scheme of things, when you look at the carbon per ton emitted on a production of aluminum, the power is 90% of that carbon.
The smelting process is important, but from a pure carbon point of view is not that high. You know, just to tell you, our focus point is still on the energy source in India, because that's where we can get the maximum bang for the buck to remove the carbon. To your point, are we looking at these technologies? Yes. Are we experimenting? Are we increasing the R&D? The answer to all of that is yes.
Okay. Thank you so much.
Thank you. The next question is from the line of Pallav Agarwal from Antique. Please go ahead.
Yeah, good evening, sir. I have a question. You mentioned in your opening remarks that, you know, aluminum prices have been supported by abundant liquidity. Do you think, you know, the tapering by the Federal Reserve with current inflation concerns, that could start having a damping effect on the, LME prices?
I think, you know, the market always responds far ahead of the event. The Fed has been talking about you know pulling back the liquidity measures and tapering for a while now. If you actually look at the aluminum prices today, they are running at $2,650 compared to where it was a couple of months or a month and a half or two months ago at about $3,000. I think the monetary policy part is already baked in. What is coming back is the basics of supply and demand. The basics of supply and demand is that even with whatever you say, we still have a deficit today after nine months of the calendar year at 0.9 million tons, and people are predicting it to go up.
I think that, you know, the between the tailwinds and the headwinds for aluminum, the basic fundamentals are still pushing towards a much more firmer LME. Please don't ask me to predict it.
Sure, sir. Because in the past, you know, sometimes we've seen that when interest rates go up, you know, the carry trade, you know, between the forward and the spot, you know, that some unwinding can take place. So that was just one of, you know, one-
No, that has already taken place. If you look at the aluminum or even the copper, the aluminum is a very small contango for three months from $15 or $18, and then it's a backwardation. That carry trade is not driving aluminum prices right now.
Sure, sir. Also any change in our hedge position from last time?
No. As we said, right now we are just watching because it's a big backwardation. For next year it's a $150-$170 backwardation right now.
Sure, sir. What do you think is causing this backwardation? Is it that the short-term supply squeeze is pushing up spot prices? You know, any
Yeah, I think so, because you see the aluminum prices shot up to $3,000 very fast. That's why the big backwardation. At that time, the backwardation was even more. Now the backwardation is slowly coming off. If you see now, LME seems to be trading between $2,600 and $2,700 right now. I think the market is waiting to see, you know, whether this range holds or whether it starts to go higher.
Okay. Yes, sir. Thanks for that insight.
Yeah. Thank you.
Thank you. The next question is from the line of Sumangal Nevatia from Kotak Securities. Please go ahead.
Thank you for the opportunity. First question is with respect to the copper division. Margins have recovered very strongly at INR 350 crore run rate. The commentary on TCRC is expected to be better in the coming calendar year. Do we expect this run rate to be the new normal given our production volumes have also now stabilized?
Sumangal, like the only thing I'm really happy about copper is that the operations are stabilized, the production is running steadily. I think that, you know, I'm hoping that it will continue. I mean, the copper results, if you listen to the remarks, the value-added sulfuric acid prices have been very strong. That has really helped the EBITDA on the copper side.
Understood. Do we expect now the CC rod utilization at least to start with to reach a 100%-odd levels of our cathode volumes?
Of the cathode volumes, you see our cathode volumes is around 370-380, and now our CC rod capacity will be 570. We do have some commitments to sell cathode. That's why we may still do that. The demand of copper in India is still at 80% of the pre-COVID levels. I think that one large part of that is because the copper prices ran up so much that today many of the MSMEs and SMEs can't. The working capital block of dealing with copper has become a big burden on them. Otherwise, I would have expected the copper to come back. The large players can handle it. Of course, the severe backwardation in copper also is a problem for them.
Because, you know, they buy the copper, in a couple of months the end product will go out, and they like to price, you know, N +1 , N +2 . So if it's in a backwardation, it's a big issue for them.
Mr. Pai, next question is to you on the Novelis business, broadly on the strategy point of view. Now if you see the can segment, we have a very strong outlook. Whatever debottlenecking we are doing appears to be at best replacing our hot mill capacity for the new auto lines. Maybe two years, three years down the line, we might start losing market share if this strong demand continues. At what stage do we start considering a greenfield hot mill? What could be the ticket size and what is the ask from our customers before we commit a big capital into a big brownfield or a greenfield hot mill capacity?
I don't think we'll wait for 2-3 years for market here. With Steve, the discussions have already started. I think, you know, I'll let Steve talk about what he's hearing from the can customers. But all I wanted to tell you is that we are very conscious that as a market leader, Novelis will lead the push to add new capacity. Steve, you wanna just talk about the can market?
The flat roll aluminum markets are strong really across the world, but they are driven a lot by a large base in these beverage or in beverage can. We see this opportunity. We're in dialogue with our customers and see it probably most predominantly in North America and Europe regions. As far as, you know, discussions and contract sizes, you know, those are all things that we're working through right now with the strong demand and continue to evaluate the opportunity. As far as, you know, whether it's continued debottlenecking and brownfield expansions or greenfield, those are still discussions that will happen, so it's probably too preliminary to discuss, you know, size of investments.
We certainly understand the opportunity and as Satish Pai said, as the market leader here, really envision leading the industry in adding additional capacity here.
Understood. Just in terms of ticket size, I mean, when we just do finishing line, it's $200 million. For a hot mill, greenfield, brownfield, could it run into $1 billion plus kind of a ticket size?
I think why don't you wait for us to announce our spending? I think there's no point in just speculating. You're right to say that it is going to be a certain number of x times just optimization project or a cold mill.
Got it. Thank you and all the best, sir.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants in conference, please limit your question to two per participant. If time permits, you may join the queue for any follow-up. The next question is from the line of Abhijit Mitra from ICICI Securities. Please go ahead.
Yes, thanks for taking my question, and congrats on a great set of numbers. My question is more on the metal sales in the Indian operation. We are looking at around 330-340 KT run rate. How do you see this number changing, you know, over the next couple of years? Also if you can give a brief update on the expansion plans out there. Any new additions? Any thoughts that you'd like to share? Thanks.
Look, the run rate is not 338. As I said, 10 KT was a spillover. Normally, it's around 320-325 per quarter is what we normally sell. And I think that the bigger project for us is that we are now at about 36% of it is value added, and we have announced the Silvassa extrusion plant, the FRP expansion, and we are steadily trying to improve the value added percentage from 36% upwards. That's really our strategy. From a pure metal total upstream, downstream total sales, that number is not going to move up too much in the next two years because we are not adding any new smelter capacity. Now that being said, we do have one line that we had closed in Renukoot.
We are restarting that line in November, so we will get about 20-30 KT more of metal coming in. Annually, not per quarter. Yes.
Right. The other question which I had was that given the spot prices of input and assuming that I am buying alumina, what kind of margins is current metal prices giving to a smelter as per you?
Sorry, metal price? I didn't get the question. Alumina is spiking up, so?
No, I'm saying that given spot prices of the inputs and assuming that I'm buying alumina from the market, what kind of spread would a completely unintegrated, you know, smelter in India make today with the power costs that he's facing, given the current alumina?
Well, I think that you probably need to look at one of our competitors and make that assessment.
Yeah, but it'll be very thin. You know, it is running quite thin, is what the assessment would be.
Yeah, it depends. I mean, today, the spot prices of alumina are $450, but you have to realize that, you know, people normally will look at it over a quarter, a few months. If it persists at $450, then yes, somebody who does not have alumina is going to get badly impacted.
Right. That's all from my side. Thanks.
Yeah.
Thank you. The next question is from the line of Raashi Chopra from Citigroup Global Markets. Please go ahead.
Thank you. Just on the alumina side, you mentioned that the pace of sales will be higher. Just trying to get a hold of how much will Utkal replace internally and how much should we kind of factor in incremental alumina sales going forward?
Currently our plans are for the second half of the year, we'll probably sell about 150 KT of alumina on the third-party market.
Can I assume that run rate for next year or do you need to take a decision on that?
No, I mean, the run rate for next year, you know, you could say is going to be in that range. You know, 150 into two.
Okay. Just again, I missed this. On your coal breakdown, what was the breakdown in the quarter? Coal sourcing breakdown.
It was linkage 62, e-auction 34, own mine four.
This future, how will that change into the third quarter?
It won't change much.
The coal cost was flattish, you said on a quarter-over-quarter basis.
I said Q2 to Q1 was flat, and I said Q3 coal prices will go up because I've already said our cost of production will be 8% higher than Q2.
Right. Within this 8% it's the bulk of it would be coal and I would imagine, yeah.
It's, you know, coal is 40% of our cost. There are others that have also gone up. It's a mixture. I would rather leave it at that to give you an overall 8%.
Just one last question. Are e-auction prices sustaining at elevated levels? You know, with the coal situation improving?
No, I think now, as I said, the production has already also started to go up. I think that auction prices are going to taper down now.
Okay. Thank you.
Thank you. The next question is from the line of Bhavin Chheda from ENAM Holdings. Please go ahead.
Yeah. Good afternoon, sir. Good set of numbers. I missed out if you had given the hedging position at the end of quarter.
One of your colleagues asked me, "Has anything changed?" I said, "No." You know, we are, if you just want it, at about 30% hedged at 1900 for the second half of the year. No change. It was what it was.
30% for second half. Actually, sir, you were hedged for 23% also you had given earlier.
No, the 23% is for next year at $2,230.
2,230 for next year, 23%.
Yes.
30% for second half at $1,900.
Exactly the same as what it was at the end of last quarter. Nothing. No change. The rupee was, you know, second half 19% hedged at 78.6. For next year, 10% hedged at 83. This is exactly what it was. No change.
Okay. On the copper now, sir, this run rate is sustainable for production volumes and even CC rod. There was a good pickup in volume, so
The CC rod actually should pick up. We are producing only 70 KT per quarter. We can do lot more now. As I said that, you know, some part of it, the market demand needs to pick up.
Okay.
Copper CC rod sales should go up next quarter.
The last one, what kind of deleveraging we are looking at in second half and next 12-18 months?
Yes, free cash flow should be good in the second half. It's a question of whether we want to prepay certain debts at this point of time or not. We are in the process of evaluating the next five years plans and putting the numbers in place. We do have an INR 6,000 crore debenture, which is due from April to August 2022.
That will definitely go off our balance sheet next year. Earlier, our plan was to refinance only INR 4,000 crore out of this and pay down INR 2,000 crore out of our interim cash. We are re-looking at that, and we are seeing that probably we may not need to refinance even INR 4,000 crore. We'll come back with a more clear position. We will hold another investor day sometime in February, March again this year, and that's when we'll come back with a comprehensive plan going forward for both Novelis and India.
Sure. Thank you.
Yes.
Thank you. The next question is from the line of Simon [Shen] from AllianceBernstein. Please go ahead.
Thank you. Just one very quick question. I've heard that you mentioned that you guys are restarting a line at Renukoot. I understand it's a very small line. Just two questions over there. How long does it take to ramp if you start in November? On average, what's the cost [inaudible] versus your current operation? Thank you.
In Renukoot, we have about 13 lines. It's one line. It should take us about a month and a half to ramp up. The cost of production will be what it is right now. It's not gonna be higher.
Okay. What was the reason why you shut down before? Was it just maintenance?
No, I think we took that decision to shut it down at that time because it was actually we had some you know the rectifier issues that the power consumption was too high. When we shut it down, we have fixed all those issues. Now we you know we were also wanting to start it earlier this year. When we saw the coal situation get tight, we postponed that decision to November. Otherwise, that line should have come back on stream around July, August.
Okay. All right. Thank you very much. All the best next year.
Yeah. Thank you.
Thank you. The next question is from the line of Prashant [Jain] from DAM Capital. Please go ahead.
Yeah. Thanks for the opportunity. Given the strong cash flows that you have across the board, both in the Indian business as well as in Novelis and also Utkal would also be generating a little bit of cash flow. How do you now look at your capital deployment? Would you want to revisit them between CapEx long term, short term, and distributing more because you already have kind of reached more than desired optimal leverage levels. The cash flows, you know, keep on coming up stronger than what anyone would have anticipated probably a year ago.
Yeah.
In capital management.
Yeah. Really speaking, as I said, earlier, we'll be coming back to you around February, March again this year. It'll be exactly one year from the last time that we actually announced the capital allocation framework. I don't think we can revisit on a quarterly basis. We would every year probably come back to you around this time. That's the time also we have our planning and, you know, exercise also completed. We'll come back to you, and we'll announce and revisit if required, and come back to you with clarity as to how we look at it going forward.
Sure. My next question was with respect to your downstream projects in India. If you could just give us an update on where we are with respect to aluminum downstream expansion as well.
The Silvassa project, after we got all the clearances, the civil work has started. All the extrusion presses which have all been ordered. That project is moving around quite well. The big, FRP expansion project we announced in Sambalpur between Hirakud and Aditya, we now are waiting to finish the public hearings and all that, which should happen in January. We think that we will be breaking ground and starting civil work sometime in March of next year.
Sure. Thanks.
Thank you. The next question is from the line of Tarang from Old Bridge Capital. Please go ahead.
Yes, yes. Good evening. Two questions from my side. One, you know, so source of power and cost of power is obviously a big factor which will drive your upstream capital allocation besides LME. Does your apprehension on committing new capital to upstream also stem from the fact that as we move forward, a lot of global incremental demand could potentially be fed by secondary metal?
Not really. I think that, you know, I think we have discussed this on many calls. Now the biggest issue for a smelter expansion in India is two things. One is the availability of your power source, and second is the type of power source. We have made commitments from an ESG point of view. So if we are going to announce coal-based expansion of smelting, we are going to have a lot of problems with our investors. The second point equally is that if you look at the power situation in the country, I'm very nervous about committing a smelter without having a steady power supply that is, and a power cost that I know of. Because LMEs, let's say smelting expansions that are announced at the peak of the curve.
By the way, Aditya and Mahan were announced in 2007 when LME was at this peak. It's fairly risky. Our strategy has always been that we are going to plow this money that we are generating to more and more value-added downstream projects.
Okay. My second question is, as Utkal incremental production comes on stream and you know, you discontinue procurement of alumina from some of your other refineries, what kind of margin expansion can we see on our per ton of alumina?
No, look, I think what I'm you'll have to take into account is that Utkal is probably 100% more efficient than the Muri and the Renukoot refineries. Of course, as I've said that some part of their demand we will try to meet with Utkal. If we also balance the fact that, you know, the Renukoot refinery is tightly integrated, no logistics costs, and it goes straight away. If you can make a very good margin, if alumina prices are at $450, then we do the cost analysis, and probably it's better to sell it on the third-party market.
Okay. Thank you, sir.
Thank you. The next question is from the line of Ritesh Shah from Investec. Please go ahead.
Yeah. Hi, sir. Thanks for the opportunity, and congratulations on this set of numbers. Sir, two questions. One is, have you already defined the scope of pumped hydro? That's one. Is it replicable across different sites in India? That's the first question. Second related question. Anything incremental on the gas supplies costing, anything from the government? There's no interactions?
On the gas first, the gas pipeline we are expecting somewhere around January, February for the Sambalpur pipeline to come up. That's why I think that will be a very important event for us, because then we will experiment in Aditya with 50% coal, 50% gas-fired, and if that works, then we are making a big step towards our carbon commitment. We will get to know sometime next year. On the pumped hydro, you can't just replicate it everywhere because the provider has to have that ability to pump the water to a reservoir at a height. Currently we are talking about to someone who has that facility in Telangana and talking about wheeling it to Odisha.
It's not easy to just replicate everywhere because you need to have the ability to pump it high and then transmit it. I think if the national grid takes off and some of these cross-subsidy wheeling charges can be moderated, then you can take it in a place where it's generated and move it in the grid to anywhere in the country.
Thank you. Just to check, basically you indicated 50% gas and 50% coal. This is very interesting. What should be the indicative pricing on gas that we are looking at? I think earlier you have given numbers on parity, like around $4 only that it makes sense for us. Can you help us something on that?
Actually $5 is what would make sense, but it depends also on the coal price, and what will happen with the carbon taxes and all that if it gets introduced. Currently the parity price is around $5.
Okay. Sir, another question. Sir, how is Novelis Europe placed, just in case if Europe comes up with some curbs on exports of non-ferrous scrap? Is it something which is going to be good for us? We are already self-sufficient, and we procure it from the region itself. I'm just trying to make sense of aluminum scrap spreads, if some change in regulation happens, in Europe.
Big Dev , you wanna take that?
Sure.
Go ahead, Dev.
We are very self-sufficient in Europe, so we see really no concerns. The largest part of our scrap is really procured from Eastern Europe. Besides, we also buy scrap in the U.K., where we have, you know, recycling. In both these places we are very, very locally dependent, so we have really no concerns on availability in case of any change of policy.
It could be a positive for Novelis given the exports will reduce and the same situation which happened in North America versus China a couple of years back.
Yeah. Really, I think we'll see what happens. Again, you know, we are getting into speculative territory, but really all that, you know, we would like to say is that our position there in terms of supply, availability and logistics has been steadily very good and we really see no concerns for the future.
Sure. That's quite helpful. Thank you so much. Wish you the best.
Thank you.
Thank you. The next question is from the line of Kamlesh Bagmar from Prabhudas Lilladher. Please go ahead.
Yeah, thanks for the opportunity and congrats for good set of earnings. One question on the side of Novelis. We had guided $1.5 billion of CapEx over next five years. As we are seeing strong demand in North America, would we be like say doing the CapEx beyond that guidance or it would be within that guidance?
Steve?
Yeah, I think we've talked a little bit this morning about some very significant opportunities in the marketplace, driven by the sustainability trends around beverage cans. We continue to evaluate those opportunities. You know, we, as Praveeni mentioned earlier, we had put out some guidance a year ago. We see more opportunity probably strategically than that guidance, but it's let us come back, you know, in that February time frame, and we'll be able to talk, I think, in more specifics about some of the growth CapEx at the Novelis level.
Just to stretch it out, what configurations will be there on that part, like, say, on the net debt EBITDA or, like say that, the capital allocation policy which we had highlighted that what percentage of, like say cash flows would be dedicated on that part? Would there be any color on that?
No, I think the issue that we are talking about is not the percentages. It's that the cash flows that we had talked about in February, the amount of the cash flow is going to be larger. The point is that, you know, you probably will have the 1.5% was done as, I forget now, 55% or 60% of the cash flow. That 55% or 60% will be lot more than 1.5, I think is the point that is being made. I think that as Steve said, Bagmar, we do recognize, and I think there are going to be more expansion organic projects, and we will outline that in February. We are working on it now.
Thanks a lot, sir.
Thank you. Ladies and gentlemen, due to paucity of time, that would be our last question for today. I now hand the conference over to Mr. Satish Pai for closing comments. Thank you, and over to you, sir.
No, thank you very much. I think we are quite happy that between Novelis and Hindalco, we had a great quarter. I would dare to say that it probably shows the advantage of the integrated model between upstream and downstream now. Because the downstream is steadily performing, market is good. When the macro is good, the upstream pitches in. I see, I think that is what shows in an integrated model that we have delivered a fantastic quarter. Thank you very much for your attention, and wish you the best.
Thank you very much. Ladies and gentlemen, on behalf of Hindalco Industries Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.