Brazil World Cup to Buoy Birla’s Aluminum Sales: Corporate IndiaAbhishek Shanker
Hindalco Industries Ltd., the world’s biggest supplier of aluminum for cans, is counting on next year’s soccer World Cup and the 2016 summer Olympics in Brazil to buoy demand amid sagging sales at home in India.
Novelis Inc., a unit of the company controlled by billionaire Kumar Mangalam Birla, has spent about $340 million in the South American country to expand recycling and rolled aluminum capacities, Vice Chairman Debnarayan Bhattacharya said in an interview. Novelis, which supplies to the world’s biggest drinks-can maker Rexam Plc, and to Coca-Cola Co. and Anheuser-Busch InBev NV, started its new capacity in Brazil last month.
“We expect a surge in consumption and with football World Cup and the Olympics coming consecutively, I have no doubt that we will do very well,” he said. “Hopefully we will start serving from Brazil’s expanded unit in another month or so.”
Struggling with falling prices caused by a global surplus of the metal and Indian sales that fell to a two-year low in the quarter to June 30, Hindalco is looking at events like the FIFA World Cup that attract visitors from around the world and drive consumption of soft drinks and beer. During the London Olympics in 2012, Coca-Cola, the No. 1 beverage company, had estimated it would serve 23 million drinks over an eight-week period, equivalent of about 338 tons of aluminum if served in cans.
Novelis on July 30 opened its expanded aluminum rolling operations in Pindamonhangaba, Sao Paulo. The expansion increases production capacity at the plant by more than 50 percent to over 600,000 metric tons of aluminum sheet a year in the largest capital expansion by the company in the continent in the past decade.
The company is targeting to sell 60,000 tons from the new unit this fiscal year, Steve Fisher, chief financial officer said in an earnings call on Aug. 12. The company is ramping up the unit to be able to meet rising demand, Philip Martens, chief executive officer said on the same call.
“With our expansion, we will be able to keep pace with the demands of our customers who are also investing in building capacities,” Bhattacharya said. He didn’t give details of expected earnings from sales during the World Cup and Olympics.
The facility is an integrated hot rolling, cold rolling and recycling complex located in the state of Sao Paulo, midway between the major cities of Sao Paulo and Rio de Janeiro. Novelis, the Atlanta-based unit, also operates a foil mill and two aluminum smelters in Brazil.
London-listed Rexam raised its capacity at Brazil’s Belem unit early this year to make 800 million more cans. Brazil is the largest beverage can market in the region, it said on its website. The FIFA Confederations Cup in 2013, the FIFA World Cup in 2014 and the Olympics in 2016 are all set to simulate further beverage can consumption, it said.
“The sporting events may lead to higher spending and more sales but these will be short-term,” Rahul Jain, an analyst at CIMB Securities India Pvt. in Mumbai, said in a phone interview. “The specialty can market is doing well but the general consumer spending is weak.”
Aluminum prices have declined 6.1 percent this year and reached the lowest level since 2009 in June because supply is exceeding demand. About 25 percent of the global capacity is unprofitable on a cash-cost basis, Macquarie Group Ltd. said in a report on July 18.
The metal will be in surplus next year by 1.17 million metric tons, widening from 870,000 tons in 2013, Barclays Plc said in a report the same day. The industry’s cost-based price, linked to the average production expense, is $2,300 a ton, according to Moscow-based United Co. Rusal, the world’s largest producer. The benchmark LME contract for delivery in three months traded recently at $1,947.75.
Hindalco’s sales in India declined in four of the past five quarters while net profit has dropped in six of seven, according to data compiled by Bloomberg. Shares of the Mumbai-based company rose 2.7 percent to 96.05 rupees, paring this year’s loss to 26 percent this year, compared with a 5.8 percent loss in the benchmark S&P BSE Sensex index.
Of the 50 analysts who track the stock, 20 recommend buying it while 16 favor selling, according to data compiled by Bloomberg.
Novelis is facing “headwinds” because of weak demand in North America and margin pressure in Asia because of higher capacity in China, Anand Rathi Financial Services Ltd. said in a research note dated Aug. 16. The unit’s adjusted earnings before interest, depreciation, taxes and amortization, fell 21 percent in the quarter ended June 30 to $204 million, while Hindalco’s standalone EBIDTA was at an 11-year low, according to the note.
“We believe earnings performance has a huge scope for improvement,” the brokerage said in the report. With Hindalco in the midst of a $6 billion expansion in India and $1.5 billion at Novelis, “returns are still some time away.”
Novelis, which saw a 9 percent decline in adjusted earnings before interest, taxes, depreciation, and amortization in the fiscal year ended March 31, is a monopoly producer of flat rolled products in Brazil. The challenge in Brazil is to commission projects at “faster than anticipated” pace to meet expected demand in the second half of the year, Martens said on the Aug. 12 call.
Each year, more than 280 billion beverage cans are manufactured worldwide, and more than 85 percent of them are made from aluminum, according to Novelis’ website. The company is the largest recycler of the light-weight metal, including around 40 billion cans annually.
The 2010 World Cup in South Africa attracted 309,000 visitors during the tournament, with fans spending 3.6 billion rand ($360 million) on hotels, while the London Olympics of 2012 provided a 9.9 billion-pound ($15.5 billion) boost to business in the year since they were held, according to estimates from the U.K. government last month.
“The second half of the fiscal year in Brazil is expected to be very strong and our available capacity in the region is already fully contracted in the third and fourth quarters,” Martens said. “There is a strong market demand in South America in the near term, mostly driven by the World Cup.”