Cars go aluminium, Hindalco sees gains

Hindalco Industries, the world’s biggest supplier of aluminum to carmakers, may double group sales to $33 billion in five years as Audi AG and other European carmakers swap steel with the lightweight metal.

“Automobiles are a huge prospect,” Debnarayan Bhattacharya, managing director of India’s second-largest producer of the metal, said in an interview. “The European auto market is booming. New environmental norms are an opportunity for aluminum makers.”

Billionaire Kumar Mangalam Birla’s flagship, contending with falling metal prices and rising costs, is betting on regulation to cut carbon emissions and improve fuel efficiency in the US and Europe will prompt carmakers to use more aluminum.

Jaguar Land Rover plans to start selling its first all-aluminum Range Rover SUV next month, reducing the car’s weight by 39%, while Daimler AG’s Mercedes is using the metal for its €93,534 SL model.

Carmakers use about 50 million metric tonne of steel a year globally, equivalent to the world’s total aluminum capacity, Bhattacharya, who’s also the vice chairman of Hindalco’s Atlanta-based unit Novelis, said in his office in Mumbai.

Stricter carbon emission norms in Europe are bound to lift aluminum demand, he said.

The trend to use aluminum “was started by Audi 20 years ago, and today many automakers including Jaguar are using the alloy”, said Ferdinand Dudenhoeffer, director of the Centre for Automotive Research at the University of Duisburg-Essen in Germany. “This trend will continue for the next five years, before we see materials such as plastics and carbon fibre become more widespread.”

Hindalco’s shares fell 2.6% to Rs113.7 at close in Mumbai, compared with a 0.2% gain in the benchmark BSE India Sensitive Index.

The European Union renewed its crackdown on carbon-dioxide emissions from cars by seeking a binding target for 2020, that’s 27% below the existing limit. The European Commission on July 11 proposed to cap average emissions by passenger vehicles in the EU at 95 grams a km in 2020 through varying targets for individual manufacturers ranging from Volkswagen AG to General Motors Co.

“The lightweight aluminum platform has delivered significant enhancements in performance and agility,” Del Sehmar, a Jaguar Land Rover spokesman, said in an e-mail response. “We are looking at the extensive use of lightweight vehicle technologies to all of our future products.”

Aluminum content in Europe will rise by more than 25 kg per vehicle by 2025, Novelis, which supplies Jaguar Land Rover, Bayerische Motoren Werke AG, Daimler AG’s Mercedes- Benz and Audi among others, said in June. Audi, owned by Germany’s Volkswagen AG, registered a 12.4% gain in sales in the seven months to July, while BMW posted a 7.6% rise in the same period.

Alcoa, the largest US aluminum producer, in July reported second-quarter earnings and revenue that beat analysts’ estimates as a result of an increase in orders from the automakers including Ford Motor and Honda Motor.

Hindalco, which bought Novelis in 2007 to gain 20% of the high-end aluminium market and customers including Coca-Cola, reported its biggest profit drop in three years in the three months ended June 30 at its Indian operations due to lower prices on the London Metal Exchange and higher costs, according to a statement to exchanges on August 14.

Novelis reported a 20% increase in net income at $91 million in three months ended June 30, according to a release on the same day. The company aims to add 900 kilotonne of capacity, it said without giving a timeline.

Aluminum for three-month delivery, which has fallen 9% this year, gained 0.2% to $1,846 a tonne as of 11:27 am in London. Benchmark hot-rolled steel, used in making cars, traded at $633 a tonne as of August 14, according to weekly price update by the Steel Business Briefing.

Novelis also plans to spend $100 million to build a 120,000 tonne automotive sheet facility in China and will start construction at the end of this quarter, chief executive officer Philip Martens said on August 14. Global automotive demand for aluminum is forecast to grow 25% in five years, he said.

“At present we supply from our European unit,” Bhattacharya said. “With rising demand in both the regions we have decided to set up a new unit” in China, he said.

Sales of luxury car brands took off in the last six months, Peter Jones, chief executive officer at Lookers Plc, a UK car dealership and parts supplier said on August 15. Profit per unit on new cars increased 11%, he said.

Hindalco’s increasing focus on automobile makers may be affected should the governments defer deadlines for cutting carbon emissions, said Bhavesh Chauhan a Mumbai-based analyst at Angel Broking.

US auto and environmental regulators delayed, past a self-imposed deadline of August 15, the release of a final rule requiring automakers to raise the average fuel-economy of their fleets to 54.5 miles per gallon by 2025. President Barack Obama’s administration didn’t say when it will issue the rule targeting model-year 2017 passenger vehicles sold in the US.

Hindalco is boosting capacity at home to meet rising demand. It is spending Rs27,000 crore ($4.8 billion) by fiscal year 2015 that will almost triple its domestic capacity to 1.7 million tonne helping boost revenue.

The company, set up in 1958 by Birla’s grandfather Ghanshyam Das Birla, is building aluminum smelting capacities in the central state of Madhya Pradesh and in the eastern states of Odisha and Jharkhand with capacities of 360,000 tons each. The project in Madhya Pradesh was scheduled to start in December, according to a September report on the company’s website.

“I don’t think they will be able to finish their greenfield projects in India by 2015,” said Angel Broking’s Chauhan, who has a neutral rating on the stock. Coal needed to fuel the company’s power plants “aren’t coming on time,” he said. Bhattacharya said he doesn’t expect further delays.

Hindalco, which had $16.4 billion of sales in the year ended March 31, is seeking supplies of raw materials outside India to cut production costs, Bhattacharya said.

The company aims to secure raw material supplies including bauxite and coal to fire its projects, Bhattacharya said. The two materials account for 60% of the cost of producing the metal.

“I don’t want to put all my eggs in one basket — that is India,” Bhattacharya said, without elaborating. “We are currently evaluating other opportunities outside. We may go for some mines or form joint ventures.”