Ladies and gentlemen, good day and welcome to Hindalco Industries FY 2023 third quarter earnings conference call. As a reminder, all participant lines will be in listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing star then 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, Mr. Sen.
Thank you. A very good afternoon or morning, everyone. On behalf of Hindalco Industries, I welcome you all to the earnings call for the third quarter of the financial year 2023. In this call, we'll refer to the Q3 FY 2023 investor presentation available on our 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 two of the said presentation. In this presentation, we have covered the key highlights of all our businesses for the third quarter of the financial year 2023, and a segment-wise comparative financial analysis of India Aluminum and Copper businesses and our overseas subsidiary, Novelis.
This presentation covers our Indian operations, aluminum upstream and downstream, financial and operation performances separately to reflect individual business segment performances in this quarter versus the corresponding period of the last quarter. The corresponding segment information of the prior periods have also been restated accordingly for a comparative analysis. We have with us on the call from Hindalco's management, Mr. Satish Pai, Managing Director, 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 forum will be open for any questions you may have on our quarterly performance. Post this call, an audio replay of the same will be available on our company's website. Now let me turn this call to Mr. Pai to take you through our company's performance in this quarter.
Thanks, Mr. Sen. Good afternoon, everyone. Thank you for joining today's earnings call on Hindalco's performance in the third quarter of FY 2023. On slides five and six of the investor presentation, you can see our progress across various metrics on ESG on a year-to-date for this year versus prior years. Hindalco is completely aligned to its ESG commitment 2050. This is reflected in our increasing share of recycling and reuse of waste in terms of bauxite residue and fly ash. In the first nine months of this fiscal, we achieved recycling of 117% of bauxite residue and 107 of fly ash, and an overall 85.6% waste got recycled and reused.
In addition to this, we are now single-use plastic free certified at 11 of our plant sites and shall soon attain this certification for the remaining six sites to become 100% single-use plastic free certified company in India. We stay committed to our zero liquid discharge at all our sites and a 20% reduction in specific water consumption by 2025 from a base year of FY19. We are on our way to achieving net water positivity by 2050. For this, we are not only implementing water audits for assessing rainwater harvesting and recycling capabilities at our plant locations but have also initiated various desalination and other projects to achieve this goal.
There was a slight increase in water consumption in the first nine months of this year, mainly due to some operational issues in our aluminum operations and an unplanned shutdown at our copper facility, which is now settled. We continue to work on green cover and biodiversity and have cultivated Miyawaki patches across our mine sites and also conducted studies by CII on biodiversity index and carbon sequestration at all our locations. We are currently using biomass as a coal substitute in Hirakud, Aditya, and Utkal facilities at 5% biomass and 95% coal. We have also completed an all-season study under our biodiversity management plan and already launched this at four of our mine sites with formulated specific goals. On the renewables, we target to reach 300 MW of capacity by 2025.
Out of this, we have already implemented 100 MW in the last financial year, 9 MW have been commissioned during the first nine months, and another 141 MW of renewable projects are under execution and finalization with target completion dates as mentioned in this slide. Aluminum specific greenhouse gas emission at the end of the first nine months of this fiscal was recorded at 19.14 tons of CO2 per ton of produced aluminum, clocking a remarkable 2.6% improvement compared to the last financial year. We are committed to zero harm on and safety at all our plant locations. The LTIFR in India was recorded at 0.31 at the end of the first nine months of this year. Unfortunately, we had two fatalities of contract workmen during the first nine months of this year.
Let me now give you a glimpse of our quarterly consolidated performance. This quarter's performance on a consolidated basis was impacted by rising input costs and unfavorable macros, which was partially offset by higher volumes in the India operation, along with continued better performance of the copper business. Our quarterly consolidated EBITDA declined 48% YoY at INR 3,930 crores, whereas the consolidated tax for continuing operations declined by 63% YoY to INR 1,362 crores this quarter. Hindalco at the consolidated level maintains a strong balance sheet with a net debt to EBITDA at 1.6, well below two times at the end of December 2022. Consolidated net debt stands at INR 41,716 crores. At India, the net debt is INR 3,071 crores, and for Novelis it's INR 38,645 crores.
All our strategic CapEx in India as well as in Novelis are matched with cash flow generations in the business and are in line with our capital allocation policy disclosed at the beginning of this financial year. On our India hedge position for aluminum business, we are hedged at 32% for the remaining period of FY 2023, which is Q4, at $22,500 per ton. 32% at $2,500 per ton. For next year, we have hedged 7% at $2,900 per ton so far. I'm happy to share with you that Hindalco continues to be a part of the S&P Global Sustainability Yearbook 2023 for the second consecutive year.
This is in continuation of our recognition as the world's most sustainable aluminum company in the 2022 S&P Global Corporate Sustainability Assessment at the Dow Jones Sustainability Indices that we announced in November last year. This reflects Hindalco's deep-rooted commitment to maximizing sustainability across the value chain. Coming to our business-wise performance for this quarter, Novelis delivered third quarter EBITDA of $341 million, down 33% YoY . This was due to lower shipments, higher inflationary pressures, less favorable metal benefits from recycling and unfavorable foreign exchange, though it was partially offset by higher pricing and a favorable product mix. EBITDA per ton was recorded at $376 per ton versus $544 in the prior quarter period.
Shipments in Novelis were at 908 KT this quarter, down 2% YoY , largely on account of destocking by can customers, lower specialty, including building and construction, which was partially offset by higher shipments of automotive and aerospace products. On Hindalco India's aluminum business performance, upstream aluminum performance this quarter was impacted by rising input costs and unfavorable macros. EBITDA was 52% lower at INR 1,591 crores. EBITDA per ton was at $555, and EBITDA margins were at 19.8% and continue to be one of the best in the industry in this current challenging business environment. The overall shipments of primary aluminum were at a record 349 KT. Of this, third-party shipments were 256 KT, and 93 KT was transferred to the downstream business this quarter.
The downstream aluminum business delivered an EBITDA of INR 157 crore this quarter, up 24% YoY on account of better pricing and higher volumes. EBITDA per ton was also up 7% YoY at $210 per ton, with a sales volume of 91 KT, up 6% YoY . Our copper business continues to deliver improved performance with an all-time high metal and copper rod sales this quarter. Copper EBITDA was higher by 40% YoY at INR 546 crore on back of higher volumes of CC rod, better TCRC and realization. Let me give you a glimpse of the current broader economic environment.
Global growth is projected to moderate to 2.9% in calendar year 2023 from an estimated 3.4% in 2022, before rising to 3.1% in 2024 as per IMF's January World Economic Outlook. While monetary tightening Russia's war in Ukraine continue to weigh on economic activity, adverse risks have moderated over the last few months. Economic growth proved surprisingly resilient in Q3 2022, with strong labor markets, robust household consumption, business investment, and better than expected adaptation to the energy crisis in Europe. Global financial conditions have improved as inflation pressures have started to abate. Global inflation is expected to moderate from 8.8% in 2022 to 6.6% in 2023, and 4.3% in 2024, though still above pre-pandemic levels.
Despite global headwinds, India's economic momentum continues to be resilient and the economy is staging a broad-based recovery across sectors. High frequency data indicate rebound in private consumption, higher government CapEx, robust service sector activity, and a pickup in the manufacturing sector. Growth in FY 2024 will be supported by solid domestic demand and a pickup in capital investments. The RBI projects GDP to grow by 6.4% YoY in FY 2024 from an estimated 7% in FY 2023. A CapEx-oriented well-balanced budget is likely to boost private CapEx and fuel economic growth in the medium term. Price pressures also seem to have abated in the last few months, with retail inflation back within RBI's target range in November 2022. However, core inflation still remains sticky.
The RBI projects inflation to moderate to 5.3% in FY 2024 compared to an estimated 6.5% in FY 2023. In its latest monetary policy meeting, RBI hikes policy rates by 25 basis points. Talking about the industry, aluminum industry outlook in the calendar year FY 2022, global aluminum production grew 3% YoY , while global consumption grew by 1% YoY , resulting in a marginal deficit of 0.2 million tons. In calendar year 2022, Chinese production increased in certain provinces like Yunnan and Inner Mongolia, there was a decline in production in Sichuan province due to power supply issues. The overall production in China grew by 4%. Chinese consumption grew marginally by 1% YoY due to the Zero-COVID policy in 2022, resulting in a deficit of 0.3 million tons.
In the world excluding China, production increased in the Middle East, while it declined sharply in Europe due to rising energy prices. Aluminum consumption faced headwinds across all sectors except automotive and packaging. As a result, both production and consumption was flattish, leading to a balanced market in calendar year 2022. On a quarterly basis, the global aluminum production increased by 4% YoY , while the consumption declined by 1% YoY , resulting in a marginal global surplus of 0.1 million tons. During this period, the Chinese production grew sharply by 8% to 10.3 million tons, while consumption improved by 4% to 10.4, resulting in an overall deficit of 0.2 million tons in Q4 of calendar year 2022.
This growth in consumption in China was led by automotive demand, renewable capacity addition, but was partially offset by the slowing demand in the D&C segment. In the rest of the world on a quarterly basis, overall aluminum production growth was flattish YoY at 7.3 million tons. The consumption grew by 7% YoY at seven million tons, resulting in an overall surplus of 0.3 million tons this quarter. The global aluminum prices in Q4 calendar year 2022 marginally declined to $2,324 a ton against $2,354 a ton in the last quarter. This declining trend was on account of concerns of weaker demand in China and Europe and a hawkish monetary policy by the Fed.
In Q3 FY 2023, the domestic demand is likely to reach 1.16 million tons, a 13% growth YoY due to the base effect. On a sequential basis, the domestic aluminum industry declined by 2% YoY on account of slowdown in the consumer durables and packaging sector. However, the electrical segment witnessed strong growth. In infrastructure-led products, demand in airports and metros, et cetera, continued to remain strong. The global FRP demand is expected to grow at about 3% in calendar year 23 versus a similar growth in the last calendar year. The market demand for resilient and rigid beverage can sheet is expected to remain stable in the long run with a growth rate of 3%-4%, although this segment is going through a period of destocking by can manufacturers.
The automotive segment demand is led by elevated levels of pent-up demand, supported by growing consumer demand for vehicles that use a higher share of aluminum. With the easing of supply chain challenges in the semiconductor chip availability and recovery in vehicle production levels, the long-term demand for automotive sheet is expected to grow at a CAGR of 11% over the next five years. The demand in specialty, especially in the building and construction segment, showed some softness on account of seasonality and the macro environment. In other end markets, the demand had a mixed outlook with very strong demand in the EV battery components and container foil segments. The aerospace segment is expected to remain strong due to increase in air travel and rising OEM build rates in this sector.
In Q3 FY 2023, India's FRP demand is estimated to grow marginally by 3% YoY due to a slowdown in the consumer durables sector. This demand is likely to pick up in the following quarters with stable consumption of aluminum in the packaging and D&C segments. Talking about the global copper industry, the overall global production of copper increased by 1.9% YoY , while consumption grew by 1.6% YoY in the calendar year 2022 compared to last year. Chinese production grew by 3% YoY , whereas consumption grew by 2% in this period. In the rest of the world, production of copper increased by 1.1% YoY , whereas consumption grew by 1%, resulting in a marginal global deficit of 0.2 million tons in calendar year 22.
On a quarterly basis, the go-global production of copper increased by 6.3% YoY , whereas consumption grew by 5.2% YoY compared to the corresponding period of the last year. Chinese production of copper increased by 10%, whereas consumption increased by 12.1% this quarter on a YoY basis. In the rest of the world, production grew by 4%, consumption declined by 3% owing to inflationary pressures and the ongoing geopolitical issues. Overall, this quarter it has resulted in a global deficit of 0.2 million tons. The annual benchmark TCRC for the calendar year 2023 has settled at $0.226 per pound, an improvement of 35% over last year's benchmark of $0.167 per pound.
During Q3 this financial year, the spot TCRC showed an improvement compared to the previous quarter as the demand for spot tonnages from the smelters was relatively low as they were focusing on the annual benchmark negotiations. Currently the spot TCRCs have declined to the low twenties from a $0.22 per pound during November, December 2022, mainly on account of more buying interest from China in particular, and various supply side disruptions with Chile, Peru and Panama affecting production in some copper mines. Further details of our operational and financial performance in each of our business segments in this quarter, compared with the corresponding period of last year and prior year, prior quarter, are covered in further slides and annexures to this presentation.
Let me now conclude my presentation by saying that we are seeing core industries worldwide being buffeted by macroeconomic factors and are pressurized by intensified costs and customer destocking challenges. We as a company are working proactively to mitigate these headwinds and continue to deliver resilient performance across all businesses. We believe that the worst is behind us, and with our strong balance sheet and fundamentals intact, we stay focused with our value-enhancing growth strategy directed towards expanding capacities in various business segments and diversifying our portfolio to provide not only products but solutions, while expanding downstream businesses in both aluminum and copper organically. We stay committed on all our ESG goals and our ongoing projects, and will moderate and pace the new strategic CapEx both in India and Novelis in line with our generated free cash flow.
Thank you very much for your attention, and the forum is now open for any questions you may have.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Our participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the questions assemble. The first question is from Indrajit from CLSA. Please go ahead.
Hi, thank you for the opportunity. I have two questions both for Steve.
Indrajit, can I request you to unmute your line for yourself and go ahead with the question, please.
Hi, can you hear me now? Hello?
Yes, we can hear you now.
Okay. If I look at both my questions are for Steve. If I look at beverage can demand globally, and particularly in each of the key regions that you operate in North America, Asia and South America, how do you think that absolute can demand has been versus calendar 2021 in calendar 2022 YoY? Also, second part of my question is, if I compare it with pre-COVID levels, we understand that in COVID demand has increased. How are the current demand tracking versus pre-COVID levels? Just to understand how much more downside in demand we can see. My second question is, in the current weak demand scenario, what gives you confidence that whatever new pricing contracts or pricing provisions that you wish intend to include for can would be accepted by the end consumer? Thank you.
As we see the overall growth of beverage can going forward, we are very confident in the continued trends towards the decarbonized aluminum package that we haven't seen over the last several years. We continue to believe globally we'll see a 4% compounding annual growth rate for the beverage package. In North America, where we are making the most significant investment of $2.5 billion, we see 3%-4% growth rate over the next five years. This is in line with what you'll see and hear from various other customers.
The offset to the growth and the trends that we're seeing is exactly what we've been talking about, that came most acutely in the third quarter here, which is the destocking that's occurring across the globe. Primarily, North America destocking, and that cost us 60 KT just in the quarter. We do believe there'll be still some more destocking in the next couple of quarters. What caused the stocks to increase and the pullback now is the continued belief of the off-premise growth that we saw through COVID that has now shifted to back to on-premise. I think there was less visibility of that switchover by our customers globally to recognize when that was gonna come and how big of an impact that would be.
The second was just the disabled, destabilization of overall supply chains, globally. We have been importing can sheet for North America from our facilities in Asia, and that's a long supply chain. Our customers, due to the growth that they were seeing, and the need to ensure that they had adequate stock levels to capture that growth, continued to order in the first half of first two-three quarters of the calendar 2022. As the easing of the supply chain and the trend of move from off-premise to on-premise occurred, they started to pull down their inventory levels and got comfortable at a much lower level and will continue to pull down over the next one-two quarters. We see solid underlying growth.
As it relates to the pricing, we don't see any impact in the short term, destocking related to our contractual negotiations going on and feel very comfortable that we're very near fully contracted for the Bay Minette facility at rates that support the mid-teens IRR that we've been talking about. We continue to see good pricing trends in beverage packaging.
Thank you for the detailed answer. Just one follow-up. Do you think, calendar 22 can demand overall can consumption in North America and other parts would have declined on a YoY basis?
The, you're saying without the destocking?
Without the destocking, yes.
Yeah. No, it would have grown globally, without the destocking.
All right. Thank you so much.
Mm-hmm.
Thank you. Next question is from the line of Pinakin from JP Morgan. Please go ahead.
Thank you very much, sir. You know, you have mentioned in this call and last call as well that, the CapEx would essentially be adjusted to the cash flows. Now, when we go back to last year's April 2022 presentation, can you give us a sense of which are the projects which would get pushed out, given what the visibility is on this year's EBITDA?
Yeah, I think, I'm gonna let Steve answer, because I think, broadly on the India side, Pinakin, we are quite comfortable. I think this year we probably spend about INR 2,700. Next year's CapEx is still under discussion, which will be probably higher than this year's. We have enough cash that is being generated to meet that requirement. Let Steve talk about some of the phasing out that Novelis is doing. Steve, go ahead.
Yeah. Yeah, Pinakin, we've announced a couple of large projects, the Bay Minette, the $2.5 billion rolling and recycling facility, the auto recycling facility at Guthrie, Kentucky, and then a couple of deep bottlenecking projects in the North America marketplace. Those will continue to be paced from a start of production as we've outlined before. The big one, Bay Minette, to come on in 2025, middle of 2025. The Guthrie, Kentucky, recycling facility next year. We will pace the cash flows the best we can on those and optimize our cash flows over the next two to three years.
The projects that will slow down and time more to our cash flows and to the market would be the China integration between the Zhenjiang and Changzhou facilities, and then further expansions that we had anticipated in South America and Europe that will pace more in line with overall cash flows and market conditions to meet the customer demands.
Understood. My second question, Mr. Pai, is that, again, as part of the capital allocation strategy, the cash flows are supposedly to be 75% for growth CapEx, 15% for net debt reduction, and 10% for shareholder returns. Does the broad division still stay, even though the cash flows reduce or should we see some rejig between the three buckets?
I think that at this stage, you know, we are going to go through and actually we will have the annual Capital Markets Day presentation, Pinakin, by end of March or early April as we do. I would say that, you know, we don't intend to dramatically change that, but it's for sure in light of the market and the cash flows that we will see. We will take a relook at those numbers, and if there is going to be, there should not be major changes, but if we are going to tweak those percentages, I think that we'll do it during the analyst day presentation we'll do end of March, early April.
Understood. Thank you very much.
Thanks.
Thank you. Next question is from the line of Tarang Agrawal from Old Bridge Capital. Please go ahead.
Hi, good evening, thank you for your time. Three questions from my side. The specific GHG reduction in aluminum is quite noteworthy. Any specific changes that were made?
Oh. Oh, you mean the GHG the.
Greenhouse.
The CO2 greenhouse. Yeah, I think that, you know, basically we have been putting a lot of initiatives on reducing the kilowatt hour per ton of carbon that we use. Also, as our solar projects and all, both in Aditya Birla have kicked on, and we are accounting for that. That has led to it. I think that you will see this number. I think our 2025, we have got rather more aggressive targets to bring it down. As a mix of efficiency combined with renewables, you will see this trend going down. In fact, in the analyst show, we are going to show you a waterfall chart down to 2030, 2040 and 2050. That you get some comfort on how we are going to achieve what we set out to do.
The next question is from the line of Amit Dixit from ICICI Securities. Please go ahead.
Yeah. Hi, thanks for the opportunity. I have two questions. The first one is on the downstream aluminum EBITDA per ton. Actually, if you look, in last two quarters, it has remained above $250, while it has declined by $25 per ton now. It was a bit expected to be little bit more stable than the upstream. What drove here? Is it a one-off element or, I mean, how is it going to stay?
You're talking about the India downstream EBITDA per ton, right?
Yes. Yes. Exactly.
If you see my prepared remarks in Q3, we did see a little bit of softness in the market in the consumer durables. It's a little bit the same story as the can. In the cookware segment, if I'm very specific, many of the cookware manufacturers had done a lot of stocking expecting this Diwali to be like the COVID Diwali. Actually the demand was good but not as strong. The cookware, which is one of our most profitable segments, we actually had to cut back and transfer to point stock. Which is why, if you look at the sequential EBITDA, it went down compared to Q2 and then the EBITDA per ton. It was a little bit of this destocking impact on the consumables part that we saw in India.
That destocking, by the way, is completed and we are now back this quarter. You should see the numbers going back up.
Okay. The second question is on cost of production of aluminum. Any guidance you would like to give for next quarter? We saw that in standalone business, other expenses have reduced by around 15% both YoY and Q2. What has driven it?
Can you look at this other expense?
I'll just answer your.
So when you're saying other expenses, you're talking about the unallocable expenses, right?
Yeah.
Yeah. Last quarter we had a specific, you know, there's a return of capital that comes in every quarter too, typically from Novelis. It entails a certain amount of exchange gain, and we give proper disclosure about it. Along with that, we get certain dividends in that quarter because that's typically the quarter when the companies, where we have some investments, they declare dividends. Between them, there was a INR 200 crore kind of a gain there. Compared to Q2, it looks a little higher. On an overall basis, it's only a normal increase in the overheads that takes place every year due to inflation.
Coming to your cost of goods sort of question. The coal prices, you know, Q3 to Q2 went down by about 20%. We think in Q4 they'll go down even a bit more as well. I'm expecting the cost of production Q4- Q3 to go down by another 5%.
Sorry, another 5%?
Yeah, 5%.
Okay. Okay, great. Thank you. All the best.
Thank you. Next question is from the line of Tarang Agrawal from Old Bridge Capital. Please go ahead.
Hi. thanks again. just a couple of questions on power and fuel. would it be safe to presume that, between Novelis and Hindalco, the current quarter power and fuel expenses would have been elevated by anywhere between, you know, 60%-65% versus what they would have been under more, normalized scenario?
Okay, I'll let Steve answer on the Novelis side. If you look at it Y oY , the coal prices are nearly double. If you look at it sequentially, they have dropped 20%. That should give you an idea about our, you know, roughly 35%-40% of the cost of production of aluminum is power. It was really dependent. The energy prices were on the coal prices. Steve, you want to comment on the Novelis energy cost?
Energy costs for Novelis globally, we have seen them start to come off, which has been positive. Most significantly, they're coming off in the European region. Still above prices that we saw before the Ukraine-Russian conflict, but are starting to come off. And other costs in the business, including ocean trade, over-the-road trade and some other input costs are come off. The guidance we've provided is that we do believe strongly that Q3 was the low point, and we will see improvement in Q4 and going forward.
Okay. Thanks. Just a follow-up. Sir, how do we see the commercialization of the Meenakshi coal mine and Chakla coal mine?
Chakla is progressing. We are in the sort of land acquisition and forest clearance. Chakla, we are still waiting for the official notification. Oh, sorry, Meenakshi.
Chakla could come on stream in FY 2025. Would that be the right way to look at it?
Middle of next year will be the box cut, is what we are expecting.
Okay.
Once we do a box cut, the coal will start to come by the end of next year. Calendar year.
Okay. Okay. Thank you.
Thank you. The next question is from Lanu Sumangal Nevatia from Kotak Securities. Please go ahead.
Hi. Good evening. Thank you for the chance. First question on the coal mix. Is it possible to share when and how is the coal mix changing between the auction, linkage, and any import elements still there? I mean, how are we seeing the availability and the supply of the linkage improving quarter-on-quarter?
The availability of the linkage is certainly improving. I mean, we are seeing over 90% supply from linkages now. The overall mix of linkage to e-auction, I mean, compared to last quarter, linkage marginally went up from 47%-48%. The real difference that has happened, Sumangal, is on the e-auction side, which is the 37%. The premiums which were in the INR 400, INR 500 are now in the INR 200, which is why the coal prior, you know, our coal costs have dropped. Now, going forward, we do see coal availability has improved, but I remain a little bit worried about the upcoming summer again. Though the government is much better prepared, inventories and power plants are already being built up. Coal India production and their targets are higher.
Fair to say that I still, in those months of May, June, July, I remain a little bit nervous.
Understood. Understood. This 5% QOQ cost reduction, is it possible, I mean, we keep calculating on different basis and make mistakes. Is it possible to share the absolute dollar number? I mean, a broad range would also work.
Yeah. Sumangal, I think, you know, normally I've never given out a number, but only good news is that last quarter, the higher price inventory has already worked through the system. When I tell you 5% now, it will be 5%. The Q3- Q2, even though the cost went down by 5%, your back calculations will probably show about one and a half, because we had the higher cost inventory, which we had warned in the earlier times. Now, that has gone through the system, this time it will be straight 5%.
Understood. When you say 5%, is it majorly driven by coal only or there's some other treatment or some other raw material as well?
I have to say that furnace oil, caustic, all have slightly inched down.
Okay. Okay. Given what the spot market is, say, in February, I mean, will this coal price deflation continue on for few more quarters or then?
Sumangal, that's why I was saying that we are heading April, May, June is the peak because it's the peak summer in the north, and that's when the coal demand is the maximum. Everybody is preparing for it, and hoping that it's the last year's problem will not occur again. We are trying to build up stocks as we speak, I remain a little bit worried or nervous.
Got it. Thank you. This is very clear, Mr. Pai. All the best.
Yeah, thank you.
Thank you. Next question is from Lanu Ritesh Shah from Investec. Please go ahead.
Yeah. Hi. Thanks for the opportunity, sir. First is clarification to Sumangal question. You indicated cost of production went down by 5% from Q2- Q3, and we expect another 5% into Q4. Did I hear it right?
You heard it absolutely right.
Perfect. That's very helpful. Sir, my first question is, if you could please comment on the implied premiums that we look at for downstream operations in upstream operations in India. One is, broader, how the physical market premiums are playing out. Secondly, we are doing a lot of stuff on the downstream side. We still see a decline on implied realization adjusted for LME. How should we read into it?
Sorry, your question is on the EBITDA per ton in the downstream, because I just answered that Q3- Q2.
Right. sir, I'm referring more from a realization standpoint. We report a particular realization per ton, and what we tend to do is we subtract that number from LME, and we derive at a particular number, which is a reflection of physical market premiums and the product mix. This is where we see a decline.
Yeah, I think that, you know, probably, time to tell you that even our own downstream, there is a certain amount of metal lag. If you see, Novelis actually pulls out that number and declares it. If you see Q3, was quite a large, nearly $100 million metal price lag. Between the India upstream and downstream, that lag also exists. That is what you're seeing.
Okay.
Because as the premiums go down and the LME marginally went down, there was a metal price lag.
The product mix changed a little bit because coker is.
Yeah, that was the CP part. I think he's talking about the metal price lag.
Right. That's helpful. My second question is again on coal. Any specific reason why Meenakshi notification has not come in? That is one. Chakla, sir, I understand the EC is around six million tonnes. How should we look at the ramp-up over here? Gare Palma IV/5 , Dumri, Kathautia, what is the status? I'm just trying to get my head around how the cost of production can actually move going forward so two years out.
Yeah. I think that, look, Gare Palma IV/4 and Kathautia do not really... I mean, they were, got in at slightly higher prices, if you remember. I think that Chakla coming in will certainly be the one that will make the most impact. Chakla's, if we do the box cut middle of next year, you should start to see production of coal. That means we'll be removing the overburden and all by the end of next year, calendar year, that is December of 2024. From 2025 you should start to see the ramp-up. The ramp-up will take probably, a couple of years to get to that full six million tons. What has happened in Meenakshi is fairly, it's quite complicated, but it's related to land acquired under Coal Bearing Act.
I'll have to explain that to you offline. There are about 10 mines that have been auctioned and stuck because of this one issue. It is hopefully going to be resolved.
Sure. Sir, Dumri nothing to expect. Gare Palma IV/5.
No, Gare Palma IV/5 we have already returned, and Dumri we are also planning to return.
Okay. This is very helpful. Thank you so much for the answers, sir.
Kathautia, by the way, we are producing. We'll be producing about nearly 800 to nearly one million. That's our plan for next year.
Thank you. Our next question is from the line of Gopal Nawandhar from SBI Life. Please go ahead.
Yes, sir. Thanks a lot for the opportunity. My question is on the Novelis margin. So what we heard in the call, you know, there were lots of, lot of positive comments on the, you know, the contract prices getting renegotiated and started to, you know, reflect from January onwards, some in January, some in April. And, you know, energy prices are coming down. Freight, freight cost is coming down. Scrap availability has improved. Aluminum prices have improved. But we don't get, you know, confidence in terms of margin improvement the way, you know, we guided in the last year when fourth quarter the margins went down and we gave confidence that we'll be back in the, you know, coming quarters. ``
Despite all these positives, you know, we're not getting confidence on the margin improvement. That is first question. Second question is if you can, you know, just walk us through, you know, the, how, you know, this journey, from 376 to 525 should happen and, what all, contributors will be there, either in terms of, you know, scrap spreads, mix, and, the new contract prices. If you can just
Yeah.
Yeah.
Steve, you want to take that one?
Yeah, I'll take it. I'll also add the comment too. I think you have heard the confidence from us in getting back to the 525 per ton. We are very confident that that is a sustainable runway for Novelis. You've highlighted the headwinds that we're dealing with right now, quite well. What we haven't guided very specifically yet on is exactly how that flows in quarter to quarter, because some of it, you know, we understand and is in control as it relates to pass-throughs to revenue to our customers. Some of it is where some of the settling of some of these inflationary costs are gonna come and where scrap spreads are gonna come in.
Right now we know that we've got some near-term headwinds related to a continued destocking in the beverage packaging. That's a couple of quarters. Some of these other factors will continue to improve. We believe the 525, right now it's just a matter of the timing of when that 525 will come in. I'll let Dev maybe get into a little bit more detail as well.
Yes, Gopal, I think that, you know, just going back to the comments we made at our own earnings call, just to recap everything to give you some more confidence on what we are saying. Number 1, we told you that we seem to have seen the lowest point on a number of fronts in Q3. What do we mean by that? European energy. Gas prices are looking extremely encouraging as we speak now, extremely encouraging. It's one of the factors which we feel like, you know, the benefits of that will start coming, will start flowing in a little bit from this quarter, the future quarters will reflect the benefit. As we end the winter, we have confidence that we will see a sustainably improved trend.
We always told you that load was causing us a total of $25 million every quarter besides other regions energy costs also adding to it, number one. That is what I keep calling transitory inflation, right? Number two, overall also, we generally see freight and other inflationary headwinds settling down. You know, it is not like it is going to happen between one quarter and another. We are also carrying inventories that we produced, you know, from earlier times, and some of the brunt of that, you know, we will bear in one or two quarters to come. Just understand transitory inflation, you know, which we think will settle down. As we said, as Steve also alluded, our CP will continue to go up because of the new contracts that are getting activated because of inflation clauses that are getting activated.
The two things will happen is CP going up, inflationary costs, the transitory inflationary costs coming down, right? Then, you know, on the metal side, we see some very encouraging signs as far as South America is concerned. We were really, you know, bearing some big downsides on metal availability in South America, but there are encouraging signs. North American freight settling down and logistics improving is another encouraging sign. We have a number of things, you know, where we think that we've touched a low point. This is not a turnaround that we expect between one quarter and another because the destocking will continue. You know what we said is next couple of quarters, you know, we will see an improvement, but not exactly going all the way to 525.
Towards the end of next fiscal year, towards the second half or towards the end of the next fiscal year, you know, we seem to be getting over all the current headwinds and, you know, that's the journey. We have touched a low point. From here we will see the path upwards.
Sure, sir. This entire journey will be driven by acts of scrap spreads or there is some dependence on the scrap spreads, assuming scrap spreads remain the way it is.
The thing is, that I'm already telling you this, that, you know, we were really bearing the brunt of South American squeeze on scrap. We see an improving situation, which really means that overall scrap spreads will be on the very encouraging side. I want to use this, you know, opportunity also to tell you that, maybe you guys, you know, sort of, got used to those $1,000 plus margins in South America, which was like very easy scrap availability during COVID time for many reasons. you know, but, you know, we'll not get all the way there, but we will definitely get better than we have seen in the last couple of quarters. You know, we will definitely get on the better side of it.
Scrap spreads, particularly in South America and North America, are going to see some encouraging trends. That is going to play a role for sure.
One last thing, sir, on Novelis. That is, this. We have 60% hedges on energy. We are not sure at what price the hedges were taken. You know, we are seeing lot of correction in the energy prices, gas prices. Not sure whether you know that NPN will impact in the near term on the energy side. Are we factoring in that?
I can tell you directionally. Yeah. Yeah. I mean, you know, the, the hedges that we have taken are, you know, sort of are, you know, compared to current prices, you know, we are kind of in the same ballpark or zip code, you know, so we should not be too worried about it. You know, the drop prices that we see now, you know, we are still kind of, you know, sort of they are, they are slightly higher in the case of gas and in the case of electricity, you know, they are in the same range. yes. Just, just to give you some input.
Sure, sir. It was very helpful. Thanks a lot, sir.
You're welcome.
Next question is from the line of Pallav Agarwal from Antique Stock Broking Limited. Please go ahead.
Yeah. Good evening. firstly, you know, given that, you know, current alumina aluminum average for this quarter is closer to $3,500, probably about $200 higher than Q3 average, and that we're expecting costs to come down by about 5%. you know, broadly, I mean, spreads should have bottomed out, and we should see a significant uptick in Q4. Is that a fair assumption?
I. Is this sort of both Novelis and Alcoa broad question? The answer is, as we have been saying, Q4 will be much better than Q3 for both companies.
Sure, sir. Okay. Also, sir, if you could just provide us with what are the amount of alumina external sales? Because if I, you know, work backwards, Utkal EBITDA seems to have improved pretty significantly from Q3 levels. Just want to check if that is.
In Q3 we sold 150 KT. I think in Q2 we had sold even more. We had sold 215 in Q2 last year. In Q3 we sold another 115. Q4 we'll be selling another 150-160 KT. It depends on the price of alumina as well, huh.
Sure, sir. I think current prices have been pretty firm, so alumina as well.
Yeah.
I think that should also help.
Help. Yes. Yeah.
Sure. Just one final thing, sir. What's your view on China reopening? Like, you know, there are probably mixed, you know, expectations on how it will play out. What's our view on?
Yeah, I mean, you know, when I'm asked about what can impact LME, the three things that are most important is the energy prices in Europe, which is sort of a by-product of the war. It's the Chinese economy and the U.S. economy. I think, you know, generally people are getting a lot more hopeful, but I think we should give it a bit and watch because after Chinese New Year they have just reopened. We'll have to watch a little bit. I mean, the tourists are out to every country, including Europe. Thailand, they are filled with Chinese tourists. They have dropped completely all the COVID restrictions. The second part of the story, which is that their economy gets back on track, we'll probably have to give it a little bit, a month or so to see how that pans out.
It's very important for the aluminum business that the health of the Chinese economy picks back up. Difficult for me to say right now whether it has happened. I mean, if you have seen in the last few days, inventories have suddenly gone up a little bit, and that's why the LME corrected a bit. There is a bit of volatility, but we have to watch. I think we will have to be watching it a little bit more.
Okay. Any likely impact to this news that U.S. could impose additional duties on Russian imports? But I guess Russia doesn't export too much to the U.S., would that probably impact sentiment in a positive way if that happens?
Not really. I mean, I'll let Steve comment on the impacts in the U.S. For me, I worry on the other side that if RUSAL metal needs an outlet. I've heard that, you know, Glencore put a big amount of RUSAL metal into an LME warehouse in Korea. The problem is that if there are no takers for that RUSAL metal, they'll have to sell it at a discount, which could pull the LME down. I'm more worried from that angle. Steve, is that RUSAL metal doesn't go much to the U.S. anymore, right?
No, it does not. I agree with you, not a large impact.
Yeah. I think that Europe was a big one. Personally, it has been going to China, and my worry is that it, I mean, it will start to show up in other parts in Asia which there are no sanctions on it.
Sure, sir. Yeah. Thank you so much.
Thank you. Next question is on line of Ashish from Nuvama Wealth . Please go ahead.
Yeah. Hi. Good evening, everyone. Thanks for the opportunity. Sir, in this, you know, this fluctuating environment when we are not very much sure about how China is behaving or US is going to behave, are we trying to hedge more than what we have done earlier? With our hedge position right now?
No, it's very difficult. See, I think this question was asked to me, last quarter as well. I said that we will start to hedge $2,600 and upward. In fact, for Q4 and a little bit for next year, we did catch $2,650 and upward. We have put our levels, $2,600 and upward. We have laddered it because I think that I don't know, I still think that this could, we could have upside.
sir, what's the current hedge position for FY 2024 and 4th quarter of FY 2023?
I just said in my prepared remarks. Q4 there is 32% hedged at $2,500, and for FY 2024 we have got 7% hedged at $2,900.
Okay. Sir, secondly, when we are talking about coal linkage availability, I think you mentioned that we are going to have 90% availability. Is that right? Because earlier we used to have 65%-70% of our total consumption to linkage, and in last quarter we had just 48%. If I remember-
Yeah. Don't confuse the mix of linkages in our coal supply with the realization of the linkages. Our mix of linkages is around 60%.
Mm-hmm.
Of that 60%, we were getting at 75%, we are now going back to the 90%. The amount of linkage coal in our overall mix is around 48% in this last quarter.
Okay. Okay. Earlier I think it was 60, 65% of the overall consumption, isn't it?
It was true, but some, you know, we had one tranche that has lapsed, and we have to rebid that 1. It's coming up in March.
Okay. That was not renewed that time. Okay.
No. It takes three months from lapse to re-putting it back up on linkage option.
Okay. Okay. Got it. Thank you so much, sir.
Yeah.
Thank you. Next question is from the line of Srikrishna from JM Financial. Please go ahead.
Good evening, sir. Thank you so much for giving the opportunity. My question is that any indication how the EBITDA per ton will be for the coming quarter? Like, what would be the growth? Anything if you can, any information you can give.
EBITDA per ton for Novelis or,
Yeah, both. I mean, India as well as Novelis.
India upstream EBITDA per ton will certainly grow. I mean, if our cost of production goes down by INR 5, we have to see where the average LME pans out. We finished, I think, at INR 1,570 crores EBITDA for the upstream business. That will certainly go up depending on the LME and the cost of production going down. On the Novelis side, I'll let Steve answer. I mean, we are going to see an upside there. I think as Dev explained, you will see a number starting with a four. I think that's about it.
Yeah, that's correct. Q3 would be the low point, and what we've guided to is movement over the next several quarters back to $525 per ton , but in the fourth quarter, something that starts to hit four.
You're basically saying that even the lower base will also help the, you know, your EBITDA pattern to improve in the current quarter?
On the percentage, yes. I think we are also trying to give some actual numbers here.
Okay. Well, thank you so much, and have a great quarter.
Thank you.
Thank you. Next question is from the line of Kamlesh from Lotus Asset Managers. Please go ahead.
Yeah, thanks for the opportunity, sir. Just one question on the part of, I think, Novelis margins. Like, if you see, prior quarter's earnings call, we have been saying that 80% of our exposure, energy exposure in Europe is hedged. Even for FY 2024, it's upwards of 50%. Why there has been so much of sync in the margins? I do understand that there is an element of destocking in beverage cans. Like I said, Like, even we see prior to COVID, the margins have been in the range of $400-$425 odd dollars.
Don't you think that there is an element of, like, say, the benefits which we got because of the lower scrap and lower energy prices which got benefited us over the last two and a half years prior to this Russia issue? Don't you think that the margins can go back to $425, not moving towards the $500 odd? Can you give some clarification on those parts?
Yeah. Dev, you wanna take a shot?
Yes, please. Yeah.
Go ahead, please.
Dev, you wanna talk about...
Yeah.
-margins?
Yeah. I'm very happy to take this question. You seem to be skeptical about our ability to get to 525. You know, I think what you're asking is really that were we just benefiting from extraordinary scrap spreads? Is that what we are heading towards? Is that your question, just to be clear?
Yes, sir. Yeah.
Yeah. you know, I mean, I should really disagree that, you know, the single driver is just on extraordinary circumstances because of which we were gaining during that COVID time. No, no. I mean, you know, we have operationally, you know, sort of gone to a much better place over the last many, many quarters. you know, it is a lot of fundamentally better things, you know, that have happened in the business in terms of, you know, volume and operational efficiencies. Remember, we are a business where, you know, incremental volumes are very, very profitable, right? you know, it is a combination of volume growth. It is a combination of pricing improvements which have happened and more is yet to come. you know, these are big levers.
On top of that, increasing recycling capacity, a lot of debottlenecking coming in the pipeline, which comes, you know, very, very efficiently. You know, there are a number of fundamental factors in the business, you know, which are giving all the right to get towards a sustainable $525 EBITDA per ton. Remember, there have been quarters where we have been way above that, and that time all the questions were, you know, why are we not guiding, you know, to a much higher number when we have a couple of quarters which are way above, you know? Let's just try to, you know, sort of stay balanced here. You know, there were quarters which we did even better. I really think in...
The short answer to your question is that we have fundamentally taken the business to a better place. With volume tailwinds, because of all the growth that we will see, on almost every front, besides the efficiencies and besides, you know, some of the other, you know, debottlenecking, you know, that will really help us really build recycling capacity and rolling capacity very efficiently. We will see sustainable improvement after we have gone through some of the headwinds we are facing right now. I can give you a lot of confidence on that front. This is not like transitory COVID thing that led us to above 500.
Thank you very much. Ladies and gentlemen, due to time constraint, that will be the last question for today. I now hand the conference over to Mr. Pai for closing comments.
No, thank you for your attention. I think that a number of your questions, probably the only thing as management we can say is that we do believe that the worst is behind us. I guess that we will let the results of Q4 when they come out talk for itself. I think we have tried to explain as much as we can, but at the end of the day, the results will show whether we were right or wrong. I hope by the time we meet again next time we would have better numbers to report. Thank you very much for your attention.
Thank you very much. On behalf of Hindalco Industries Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.