Hindalco Industries Ltd. (OTCPK:HNDNF) Q2 2024 Earnings Conference Call November 10, 2023 5:30 AM ET
Company Participants
Subir Sen – Head, IR
Satish Pai – Managing Director
Steve Fisher – President & CEO
Devinder Ahuja – CFO
Conference Call Participants
Sumangal Nevatia – Kotak Securities
Indrajit Agarwal – CLSA
Amit Murarka – Axis Capital
Amit Dixit – ICICI Securities
Satyadeep Jain – Ambit Capital
Kirtan Mehta – BOB Capital Markets
Pallav Agarwal – Antique Stock
Rajesh Majumdar – B&K Securities
Aditya Welekar – Axis Securities
Operator
Ladies and gentlemen, good day, and welcome to the Hindalco Industries FY ’24 Second Quarter Earnings Conference Call. [Operator Instructions] Please note that this call is being recorded.
I now hand the conference call over to Mr. Subir Sen, Head of Investor Relations at Hindalco. Thank you, and over to you, sir.
Subir Sen
Thank you, and a very good afternoon or morning, everyone. On behalf of Hindalco Industries, I welcome you all to the earnings call for the second quarter of financial year 2024. In this call, we will refer to the Q2 FY ’24 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 2 of the said presentation. In this presentation, we have covered the key highlights of our consolidated performance for the second quarter of the financial year 2024 versus the corresponding period of the previous year. A business-wise comparative financial analysis of Novelis, Hindalco, and India aluminium and copper business is also provided.
This presentation covers our Indian operations, aluminium upstream and downstream financials and operational performances separately to reflect the individual business segment performances in quarter two versus the corresponding period of the previous year. The corresponding segment information for prior periods have also been restated accordingly for a comparative analysis.
Today, we have with us on this call from Hindalco’s management, Mr. Satish Pai, Managing Director; Mr. Praveen Maheshwari, Chief Financial Officer; From Novelis’ management, we have Steve Fisher, President and CEO; and Mr. Dev Ahuja, our Chief Financial Officer. Following this presentation, this forum will be open for any questions you may have. Post this call, an audio replay of this conference call will also be available on our company’s website.
Now let me turn this call to Mr. Pai to take you through the company’s performance in this quarter.
Satish Pai
Thank you, Subir. Good afternoon and morning, everyone, and thank you for joining today’s earnings call of Hindalco’s performance for the second quarter of FY ’24. At the beginning, let me wish all of you and your families a very Happy Diwali.
On Slides 5 and 6 of this presentation, you can see our progress across various ESG metrics for this year versus the prior year. In our continuous efforts towards increasing green cover and biodiversity, we have successfully completed an all-season study under our biodiversity management plan for 12 of our mine sites and four units in Hindalco.
In addition to this, study at two sites and one mine cluster are also progressing well. CII’s biodiversity index and carbon sequestration ground assessment was completed in six of our units in the first half of this year. I’m also happy to share with you that Hindalco has won the UNDP Mahatma Award for Excellence in Biodiversity Management in 2023.
Hindalco continues to increase the share of recycling and reusing of waste. In the first half of FY ’24, 80% of total waste were recycled and reused, in line with the same period of the previous year. We achieved recycling of 108% of bauxite residue and 103% of ash in H1 of this year. On the emissions, Hindalco is now pursuing ozone-depleting substances, ODS, phase-out programs at all our sites and targeting to be ODS-free by FY ’26. Our flue gas desulfurization projects at Mahan and Aditya power plants are now commissioned.
At the end of the first half, our aluminium-specific GHG emissions were recorded at 19.58 tons of CO2 per ton of aluminium, which is a bit higher than last year on account of higher power consumption has some of our smelters. This is expected to settle down with better efficiencies across our plants in the coming quarters.
In terms of our progress in renewables, we have already reached 50% of our target of 300 megawatts by 2025 this quarter and completed 150 megawatts of renewables. Further 50 megawatts of solar and wind are under execution and expected to be completed by Q1 of FY ’25. On the 100 megawatts of hybrid power project, the contract is executed with a target COD bidding in December 2024. On safety, the LTIFR in India was 0.18 in the first half, reflecting an improvement over H1 of last year’s levels and remains among the best in the industry.
We have taken several initiatives to inculcate a safety culture not only in our employees, but also in their families. In addition to this, we have taken digitalization initiatives to develop the contractor safety management and a comprehensive safety audit and assurance software to further strengthen our systems to monitor safety with a target implementation date of March 2024. There were no fatalities recorded at our Indian operations in the first half of this year.
We are on our way to achieve net water positivity by 2050. We stay committed to zero-liquid discharge at all our sites and a 20% reduction in specific water consumption by 2025 from the base year of FY ’19. On the water positivity front, an additional three of our mine clusters had achieved water positivity in this quarter, taking the total to five as of September 2023. All these initiatives are in line with our target of achieving water positivity across all the mines by 2025. The civil work on the 5,000 kiloliters per day project at Renukoot is underway.
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. As a result, our desalination project and tertiary water recycling units at Dahej enables the significant drop in freshwater consumption from 18.5 cubic meters per ton of metal in H1 FY ’23 to 10.4 cubic meters per ton of metal in H1 FY ’24.
I’m happy to share Hindalco’s recognition as the world’s most sustainable aluminium company for the fourth year in a row in the S&P Dow Jones Sustainability Index Corporate Sustainability Assessment (CSA) ranking of 2023. This reflects our holistic approach to long-term ESG performance.
Let me now give you a glimpse of our quarterly consolidated performance in quarter two versus the previous quarter of this year on Slide 8. This quarter’s performance on a consolidated basis was driven by strong recovery in Novelis and Aluminium India downstream businesses, backed by a record performance by the copper business. Our quarterly consolidated revenue was INR54,169 crores this quarter, up by 2% sequentially.
Our consolidated business segment EBITDA was up 14% Q-o-Q at INR6,896 crores, whereas our overall reported EBITDA was flat sequentially at INR6,096 crores this quarter. The consolidated PAT was down 11% on sequential basis, at INR2,196 crores this quarter. In India aluminium business, we are currently hedged at around 11% at a price of $2,755 per ton for the remaining half of 2024.
On the balance sheet side, our consolidated net debt stands at INR37,613 crores. The India operations net debt was INR1,174 crores, and Novelis was at INR36,439 crores at the end of September 2023. During this quarter, we prepaid a long-term debt of INR2,120 crores in Hindalco India operation. Hindalco at the consolidated level continues to maintain a strong balance sheet with a net debt-to-EBITDA well below 2 times at 1.66 at the end of September 2023.
Hindalco has recently signed an MOU with Odisha Mining Corporation for a long-term supply of bauxite ore for its 2 million ton alumina refinery and the 160-megawatt captive power plant at Kansariguda in the Rayagada district of Odisha. Hindalco will invest around INR8,000 crores in this project in two phases. Our strategic capex in India as well as in Novelis are mapped to cash flow generations in the business and are in line with our capital allocation policy.
Coming to our business-wise performance this quarter, Novelis shipments were at 933 kt, up 6% quarter-on-quarter, primarily on account of higher beverage can shipments, which was up 12% sequentially as de-stocking activity is largely behind us. Novelis delivered a quarterly EBITDA of $484 million, up 15% year-on year on account of higher volumes and benefit on operating leverage along with better scrap utilization this quarter. The resulting EBITDA per ton stood at $519 per ton versus $479 in the previous quarter, up 8% sequentially.
On Hindalco’s India aluminium business performance, upstream aluminium performance this quarter was impacted by unfavorable macro. Total upstream shipments were lower by 2% Q-on-Q at 334 kt, whereas revenues were down 2% sequentially at INR7,878 crores. Upstream EBITDA was up 7% sequentially, at INR274 crores supported by lower costs. The result in EBITDA per ton was at $751 per ton, higher by 9% sequentially.
EBITDA margins were also higher at 26.3 compared to last quarter and continued to be one of the best in the global industry in the current challenging business environment. Total third party shipments were at 338 kt, of which upstream was 245 kt and downstream was 94 kt this quarter. The downstream aluminium business shipments were up 15% quarter-on-quarter at 94 Kt, while revenues were up 8% sequentially at INR2,629 crores this quarter. However, aluminium downstream delivered an EBITDA of INR171 crores, up 16% quarter-on-quarter, on account of higher volumes.
Our copper business continued to deliver consistent performance this quarter as well. The overall metal shipments were at a record-high of 134 kt, up 13% Q-on-Q, of which CCR volumes were 100 kt, up 2% sequentially this quarter. Revenues were up 8% Q-on-Q at INR12,441 crores this quarter on account of higher sales volume. The quarterly copper EBITDA was at an all-time high of INR653 crores, up 23% Q-on-Q, on account of higher shipments and normalization of production of cathodes post the maintenance shutdown in the last quarter.
Now let me give you a glimpse of the current broader economic environment on Slide 10. Global economic recovery remains resilient despite multiple challenges. IMF projects global GDP growth to moderate from 3.5% in 2022 to 3% in 2023, and to 2.9% in 2024. Advanced economy economic growth is expected to moderate from 2.6% in 2022 to an estimated 1.5% in 2023 and 1.4% in 2024, amid strong U.S. but disappointing European Union performance. Emerging market economies have remained buoyant with growth projected to moderately decline from 4.1% in 2022 to 4% in both 2023 and 2024.
In China, encouraging economic activity data since August 2023 and a strong GDP report in Q3 indicate economic recovery is gaining pace despite challenges in the housing sector. While downside risks remain, moderating inflation without a major downturn in global activity and buoyant labor market are consistent with a soft landing scenario. As per IMF, global inflation is expected to decline steadily from 8.7% in 2022 to 6.9% in 2023 and 5.8% in 2024. However, core inflation is expected to decline more gradually.
On the domestic front, despite the challenging global environment, India’s growth momentum is holding up driven by strong domestic fundamentals, robust consumption demand infrastructure spending, and service sector activity, which continue to drive growth. However, weakening global demand, rising geopolitical tension, and tighter credit conditions pose downside risks. RBI projects real GDP growth to moderate to 6.5% in FY ’24 from 7.2% in FY ’23 with evenly balanced risk.
RBI’s forward-looking surveys indicate better demand conditions, employment opportunities, and industrial output going forward. Inflationary pressures have also eased with CPI inflation expected to moderate to 5.4% from FY ’24 — for FY ’24, from 6.7% last year in FY ’23 on softer commodity prices and lower core inflation. The evolving geopolitical situation and its impact on crude oil and India’s inflation trajectory is being closely watched by RBI, which has kept the rates on hold since February 2023.
Moving on to the aluminium industry outlook in Slides 11 and 12. First, let me talk about China. In Q1 calendar year 2023, production in China declined in certain provinces like Yunnan, Guizhou, and Shandong due to tight power supply. In Q2, with improving hydropower situation, the government released power to the smelters, resulting in increased aluminium production, especially in provinces of Yunnan and Guizhou. In Q3, production continued to grow by 4% at 10.7 million tons. Therefore, year-on-year basis, the overall production in China grew by 3% year-on-year at 30.7 million tons.
On the consumption side, Q1 faced headwinds due to weak construction demand that led to a decline of 2% year-on-year to 9.4 million tons. In Q2, the Chinese demand recovered sharply by 7% to 10.9 million tons. And in Q2, this demand improved further to 11.1 million tons. These demands were strongly led by solar and EV markets partially offsetting the weak construction demand. Hence, on a year-on-year basis, the overall consumption of aluminium was at 31.5 million tons. As a result, the Chinese market was in a deficit of 0.7 million tons at the end of September 2023. This quarter, aluminium’s Chinese production was at 10.7 million tons and consumption at 11.1 million tons, leading to a market deficit of 0.4 million tons.
In the world, excluding China, in Q1 of this calendar year, production was flattish year-on-year at 7.1 million tons. In the subsequent quarters, that is Q3 and — Q2 and Q3, production improved marginally to 7.2 million tons and 7.4 million tons, respectively. Therefore, on a year-to-date basis, the overall production grew marginally by 1% at 21.7 million tons.
Moving onto consumption, with rising interest rates, except for automotive, all other segments faced some headwinds. As a result, consumption declined sharply by 10% year-on-year in Q1 to 6.8 million tons. In the subsequent quarters, consumption grew to 7 million each in Q2 and Q3. This decline was mainly due to headwinds in the building and construction sector as well as industrial machinery and consumer durables.
Hence, on a year-to-date basis, the overall consumption stood at 20.7 million tons and production was at 21.7 million tons, resulting in a surplus of 1 million tons. Therefore, on a year-to-date basis, with the overall global production at 52.4 million tons and consumption at 52.2 million tons, the market is in a surplus of around just 0.3 million tons. In this quarter, both global production and consumption were at 17.5 million tons each, resulting in a balanced market.
The global aluminium prices in this quarter were range-bound and averaged $2,154 a ton against $2,258 a ton in Q2. On a quarter-to-date basis, the global price of aluminium is around $2,200 a ton. In Q2 FY ’24, domestic demand is likely to reach 1.3 million tons, reflecting a growth of 10% year-on-year and 13% sequentially. This sharp increase was supported by strong demand from electrical, building and construction sectors.
However, the packaging segment faces some headwinds due to weakness in export-led demand and consumer durables showed weakness and the cookware segment. The global FRP demand is expected to decline by 3% in calendar year ’23 versus a 3% growth in the last calendar year on account of softer macros. However, the FRP demand is expected to return in calendar year ’24 to low- to mid-single-digits with demand recovery across all major sectors.
The global demand for resilient — beverage can sheet is expected to grow in the long run with a CAGR of 3%, although the customer inventory reduction is largely behind us now. The U.S. market demand is strong as promotional activities in North America will boost consumption of beverages in the coming months. The South America market is also strengthening as we proceed towards the summer with demand from beverages starting to pick up.
The automotive segment is expecting to grow at a CAGR of 11% over the next five years, driven by vehicle growth rates and lightweighting needs for fuel efficiency, performance, and electric vehicle range. This growth is led by elevated levels of pent-up demand and EVs are gaining share of the vehicle mix. The settlement of the UAW strike is a positive development for all auto sheet makers.
The demand in specialty, especially in building and construction segment, remains cloudy due to seasonality and the current macroeconomic environment, while some optimism is seen in the U.S. building and construction market with higher share of new-home build rates and ongoing demand for repair and remodel. The aerospace segment, demand for premium aerospace plated sheet remained strong.
Aircraft OEMs are forecasting a strong growth in aircraft build rate supported by multi-year backlogs of aircraft deliveries. In this sector, sustainability is also gaining importance, leading to higher consumption of aluminium. In FY ’24, Indian FRP demand is expected to grow by 7% to 8% year-on-year, supported by growth in auto and packaging segments. This demand is likely to remain firm in the following quarter.
Turning to the global copper industry on Slide 14. On a year-to-date basis calendar year 2023, overall global copper production grew by approximately 5% to 19.2 million tons. In contrast, consumption also grew by 2.8% year-on-year at 18.9 million tons, resulting in a surplus of 0.3 million tons.
On a year-to-date basis in calendar year ’23, China’s production increased by approximately 11% and 8.6 million tons, whereas consumption grew by almost 7% to 10.6 million tons, resulting in a deficit of 2 million tons. The world, excluding China, increased its production by 1.2%, whereas consumption declined by 1.9% year-on-year, resulting in a surplus of 2.3 million tons on a year-to-date basis for calendar year ’23.
In the third quarter of calendar year 2023, the overall global production of copper increased by 4.6% year-on-year, while consumption grew by 1.8% compared to the corresponding period last year, resulting in a flattish growth year-on-year. In this quarter, Chinese production increased by 9.7%, while consumption grew by 4.6% year-on-year, resulting in a deficit of 0.8 million tons. In the world, excluding China, production of refined copper increased by 0.8% and consumption declined by 1.8% year-on-year, resulting in a global surplus of 0.9 million tons this quarter.
On the domestic side, in Q2 FY ’24, market demand increased by 7% year-on-year at 201 Kt versus 187 Kt in Q2 FY ’23. On a sequential basis in Q2, the market demand increased by 3%, whereas domestic producer share was close to 72%. The copper concentrate market was balanced this quarter with mine production in line with demand from global smelters. As a result, the spot TC/RC remained steady throughout the quarter, closely aligning with the benchmark TC/RC for calendar year ’23 at $0.225 per pound.
Looking ahead to the next quarter, an upswing in buying activity is anticipated, due to the expected ramp-up and resumption of a few smelters, which were under maintenance in China. Details of our operational and financial performance in each of the business segments this quarter compared to the corresponding periods of last year as well as sequential quarters are covered in further slides and the next years to this presentation.
Now, let me conclude today’s presentation with some key takeaways. We as a company are working proactively to mitigate the current macroeconomic headwinds and cost pressures. Our resilient India business with a strong balance sheet is providing solid financial prudence to our organic growth strategies. We also continue to focus on resource security in terms of coal and bauxite, thereby reducing our dependency on external sources, while expanding our value streams in terms of downstream products.
Our copper business, again, delivered its best-ever performance this quarter. We continue to focus on value-added products that will cater to the niche segment of special alloys and high-purity copper rods and tubes. Novelis continues on a strong recovery path with higher can shipments, resulting in benefits of operating leverage due to higher volumes and also highest utilization of scrap this quarter. This is reflected in the strong sequential improvements in both EBITDA and EBITDA per ton.
Our approach in ESG continues to be comprehensive across value chains and in line with our interim as well as long-term targets of 2050. We have already achieved 50% of our target of 300 megawatts in renewables by 2025. Our LTIFR continues to be among the industry’s best this quarter as well. We continued to moderate and pace our new strategic capex both in India and Novelis, in line with our generated free cash flow. We stay focused with our value-enhancing growth strategy directed towards organic growth, while expanding downstream businesses in both aluminium and copper. We stay committed to maintain a strong balance sheet position and focus on shareholder value creation in the long run.
Thank you very much for your attention, and we’ll now open the forum up for your questions.
Question-and-Answer Session
Operator
Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from the line of Sumangal Nevatia from Kotak Securities. Please go ahead.
Sumangal Nevatia
Yeah. Good evening. Thank you for the opportunity. My first question is, sir, with respect to the copper division, if you can just elaborate, what are the drivers for such a strong performance? Is it value addition, byproduct credits, or better TC/RCs? And should we extrapolate this sort of run rate, both volumes and profitability, in the future?
Satish Pai
I think that it’s a combination of all. It’s certainly not higher TC/RCs because TC/RCs were not that high because we bought concentrates which were more richer in gold. So, I think that the higher thing is because of higher volumes. So, we took the opportunity of a higher market demand. And besides our cathodes, Sumangal, we also imported cathodes and converted to rods. So, if you look at the sales volumes that we achieved, these contributed to this very strong quarter besides the other value streams that we have, which is gold, silver, sulfuric acid, etc. Now, on the run rate going forward, I think that we would stick to a guidance of INR500 crores, INR550 crores a quarter. I would not extrapolate from the INR650 crores.
Sumangal Nevatia
Got it, sir. Sir, second, with respect to the aluminium division, is it possible to share how are we looking at the coal costs in coming quarters and overall other costs shaping up in the aluminium division in the next one or two quarters?
Satish Pai
Yeah. I think that, first, the coal cost Q1 to Q2 was 15% down sequentially. So, our cost of production was down 6% Q2 to Q1. Now, in the months of October, what, September, October, with power demand again going up, we have started to see spot auction rates coming up again. So, we have looked at the mix of coal and the other input costs. I think coal is going to be slightly up in Q3, but some of the other input costs are continuing to trend down, like caustic, furnace oil, CP Coke. So, what we are guiding now is that in Q3, you should see a flattish cost of production versus Q2.
Sumangal Nevatia
Understood. And just one last question. Last quarter, sir, you shared your outlook and aluminium prices and you said a range of 2,100 to 2,300 and looks like the prices are stuck in this range. Incrementally, are you turning more cautious or bullish given the recent developments of maybe Chinese weak demand and — but offsetting by some production cuts in Yunnan? Any incremental update on your thoughts on medium-term price outlook?
Satish Pai
So, look, what is clear to me after the London Metal Exchange Week is that demand for aluminium in China remains quite steady. So, any down in the demand due to B&C seems to have been more than made up with solar and electric vehicle aluminium demand. So, I think that if you look at the supply-demand that I had in my prepared remarks, China is in quite a big deficit for the metal, and in fact, it’s being made up by the RUSAL metal coming into China.
So, I personally believe — and now, Yunnan, again, the water has got less so they have had to announce production cuts. So, I think that, personally, the market seems to be very sensitive to any remarks coming out on either the Chinese economy or interest rate. So, I think that till things settle down, I stick with our guidance of 2,100 to 2,300. I still believe that supply and demand remains very tight, and that any clearing up of the macroeconomic environment, you should start to see a positive trend in the prices.
Sumangal Nevatia
Got it, sir. I’ll join back the queue. Thank you very much, and all the best.
Satish Pai
Thank you, Sumangal.
Operator
Thank you. Our next question is from the line of Indrajit from CLSA. Please go ahead.
Indrajit Agarwal
Sir, hi. Two questions from my side. Following on from the earlier question, given that you are still positive on aluminium price outlook, any change in thought process of what is our current hedging in for FY ’25?
Satish Pai
Good question. So, what we did is, we don’t believe that this is a time to take a forward position. So, what we did for FY ’25 is that we actually hedged around 5% taking a zero collar. A bottom at 2,200 and a ceiling of 2,517. So, it’s a — we hedge for insurance, not to take a forward look. So, for next year, we started at that 5% taking this collar. So, at one hand, we are protecting the downside at 2,200. And of course, we are accepting a ceiling at 2,517. So, that’s what we have done for next year, Indrajit.
Indrajit Agarwal
Sure, sir. Thank you. My second question is on — again, on cost of production. While you had given a very good outlook on how it is going to shape up in Q3, if you can help us understand what is your actual cost of production for aluminium at smelter level [Technical Difficulty] comparable on the — only for upstream, right?
Satish Pai
Yeah. We don’t give that out, Indrajit. I’m quite sure with your model, you can back-calculate. But I — we don’t give out the exact cost of production.
Indrajit Agarwal
Okay. Then I’ll put it differently. At current levels, so either at 2Q or at spot basis, where are we on the global cost curve?
Satish Pai
So, look, we are firmly in the first quartile. And Aditya, Mahan, Renukoot are fully in the first quartile, and Hirakud is the only one which is sort of on the right hand side. So, as a consolidated Hindalco, we are firmly in the first quartile and well to the left.
Indrajit Agarwal
Sure. One last housekeeping question, if you can give the quantum of alumina sales.
Satish Pai
Yeah. This year — quarter, we sold 138 Kt of alumina. I just wanted to remind you that our brownfield expansion of 350 kt is now on stream. So, I think you will start to see third party sales in Q3 and Q4 being at a higher level.
Indrajit Agarwal
So, we are not looking to take some shutdowns in the earlier legacy refiners?
Satish Pai
No, we’ll evaluate that, because what is happening in Muri is that even though the cost is higher there, we are not using it for smelters. We are actually selling it into the third party market where there’s a good demand for hydrate.
Indrajit Agarwal
Sure. This is very helpful. Thank you so much.
Satish Pai
Yeah. Thank you.
Operator
Thank you. Our next question is from the line of Amit Murarka from Axis Capital. Please go ahead.
Amit Murarka
Yeah. Hi. Good afternoon, sir. On alumina, so you have mentioned that you plan to set up this 2 million ton facility. So, could you just provide some more details around that, like — as to when will that come up exactly? And will that be fully for market sales or you plan to kind of back it up with some smelter capacities as well in the future?
Satish Pai
So, look, this Aditya alumina refinery is actually a very old project. And we had actually put it on hold because we did not have the bauxite mine security. Now, what has happened is that with the Odisha government, we have signed the MOU to get that bauxite supply. And hence, we are putting it up because we think it makes great economical sense. I think that the first million tons — we’ll go in two phases, 1 million tons plus 1 million tons.
The first million is around slightly below INR6,000 crores of capex that will come up in the next 36 months, because we already have the land, we already have the environmental clearance, we have already done the public hearing. So, that’s us. Now we — our current plan is to sell it in the third party market. As you remember, I have frequently reminded that until we try out the 100 megawatt of round-the-clock power in Aditya from next year, we will only expand aluminium capacity when we have more renewable power in the mix. It will not be coal-based.
Amit Murarka
Sure. Got it. Also regarding the Chakla coal mine, I believe you had said that this will start operating in October ’24. So, those timelines are still holding or…
Satish Pai
Yes. October ’24 box cut we are still holding that timeline.
Amit Murarka
Okay. And any update on Meenakshi?
Satish Pai
Good news is we won Meenakshi West, which we have got notified and we’ll start work. On Meenakshi itself, we are still awaiting the CBA land issue. We are optimistic about it. But we do not know when that will come. But the next-door mine, Meenakshi West, we bid on it and we have got the order and things like that. So, we’ll take a call — if we get both mines, we will take a call on probably to keep Meenakshi. But at this stage, we are working with Meenakshi West.
Amit Murarka
Sure. Thanks a lot.
Satish Pai
Yeah.
Operator
Thank you. Our next question is from the line of Amit Dixit from ICICI Securities. Please, go ahead.
Amit Dixit
Yeah. Hi. Good evening, everyone, and thanks for taking my questions. The first question is if you can detail about the coal sourcing mix in this quarter.
Satish Pai
Yeah, sure. So, the coal mix, in fact, we had very good materialization of the linkage. So, linkage coal was 53%, e-auction was 40%, own mines were 5%, and import and others were 2%. So, I think that this was the mix that we had. And as I said, our coal costs were sequentially on a consumption basis down by 15%.
Amit Dixit
So, sir, going ahead, since the Coal India’s production is continuously increasing and they are also satisfying power demand fully, you expect further materialization of — further higher materialization of linkage or 33% is something that we are looking at, at the optimal level?
Satish Pai
No, you see, 53% was of our mix. Our materialization of the linkages were nearly 90% this quarter. That’s why we could get the coal costs down. So, they are giving — whatever linkages we have, they’re giving — in Q2, they gave a good materialization. As I said, towards the end of September and in the month of October, the temperatures still were very high. The power demand in India was high. Then they again started to divert coals to ITC, which is why the spot auctions in October, again, premiums jumped up. So, that’s why we are a bit cautious and we are saying that in Q3, coal price could be little bit higher. But we’ll balance it off with the lower input cost from the other side, and we are guiding for a flat cost of goods production.
Amit Dixit
Okay. That’s very helpful, sir. The second question is on the note number nine of the consolidated financial statement wherein you have mentioned that in October ’23, you have decided to coal — sorry, close a cold-rolled and finishing line in U.S. So, I just wanted to understand the — what are the typical products for which segment they are being closed down? And when you have mentioned that the total expense would be $25 million to $35 million, some of it is accretive depreciation. So, just wanted to understand the cash outgo out of this $25 million to $35 million.
Satish Pai
Sure. Steve, Dev, do you want to take this with Clayton, I suppose, closure?
Steve Fisher
Do you want to take it? I didn’t understand the question exactly.
Satish Pai
He’s talking about the shutdown that we have announced of our plant in Clayton and the…
Devinder Ahuja
Yeah.
Satish Pai
Yeah. And the guidance that the cost of shutting down could be $20 million to $25 million. It’s in one of the notes. So, if you can just give an update on that.
Devinder Ahuja
Yeah. So, I was not able to hear the question earlier. But basically just as a full background, so this is a plant which economically simply does not make sense. Because of the kind of products we are making there, we don’t see any future. It’s an old plant with high fixed costs. And so, most of this impairment or write-off is going to be basically book value of assets. And it’s going to be a $2 million of severance costs.
So, it is simply good economics and just makes sense to get this facility to closure. As we announce the next quarter, we will give some more details. But the headline is that these products don’t have too much of a future. They are in a highly competitive segment. Fixed cost savings is going to be extremely good in order to sort of really quickly pay back on the onetime cost that we are going to incur to close the plant. That’s really what it is.
Amit Dixit
Are there any other sites that might be in your radar at this point in time that are having high fixed cost and uneconomical products that you might decide to close later on?
Devinder Ahuja
Well, we keep looking at it. I mean, there is — we always keep looking at rationalization opportunities. And it’s like never say no. This is a continuous evaluation that we keep doing based upon markets, based upon sort of really what makes sense in the overall strategy. So, at this moment, this is what we have. But it’s a continuous process of review.
Amit Dixit
Okay. Thanks and all the best.
Devinder Ahuja
Yeah. Thank you.
Satish Pai
Thank you.
Operator
Thank you. Our next question is from the line of Satyadeep Jain from Ambit Capital. Please, go ahead.
Satyadeep Jain
Hi. Thank you. Just a follow-up on the alumina question, Mr. Pai. It seems like the company is increasingly going long alumina. What’s the strategy or thought behind that? Do you see shortage of Alumina globally? Do you think the mines, the facilities you’re looking at could be maybe lower cost compared to some of the other refineries? What’s the thought process behind — because you’re already along — alumina going further along. That’s the first question.
Satish Pai
Yeah. Good question. I think that what we look at is fairly a regional market, largely taking the Middle East smelters into view. So, if you look at the whole spectrum from EGA to Sohar to ALBA, I mean, for us to sell about 1 million tons to 2 million tons of alumina in this market — and we found that the pricing we get it linked to index to LME. And as you rightfully said, the cost of production of alumina that we can achieve, there is a very healthy return on these investments. So, which is why we are doing it.
Satyadeep Jain
So, you — there is — so, on this new facility you’re looking at and the new OMC, just tied to that would be there is no further potential to expand Utkal. And also the Baphlimali mine that you have is one of the cost competitive advantages you have in producing alumina at Utkal. Would you not have capability to use that mine? And if not, would OMC mine also have similar characteristics to be able to give you that kind of advantage?
Satish Pai
No, see, the issue with Utkal is we started, I think, with 1.5 million tons when we originally set up Utkal. Today, its capacity is already 2.5 million tons. So, 2.5 million tons into 3, so what is getting clear is that if we keep expanding in Utkal, the Baphlimali mine will run out very fast. So, we wanted to preserve at least a certain mine life in Baphlimali and open up a new source of bauxite. This is really looking into the next 10 years, 15 years for the company.
So, which is why we did as much brownfield expansion, which is nearly 1 million tons we added to the Utkal capacity, and we think the time is right now. And by the way, as I said, it’s not a new project. This was always in our plans ever since I joined Hindalco. But we didn’t have that bauxite security, which is why we waited till we got that to do this project. And alumina certainly seems to be a pretty safe investment and a good return right now.
Satyadeep Jain
Okay. Just one quick question on the linkage coal. I think a couple of quarters ago, you mentioned that 3 million tons of Tranche 2 and 3, they had expired and you were in the process of auction and maybe they will get settled by 1Q. What’s the update on those auctions? Have you got those 3 million tons back?
Satish Pai
Yeah. We got Tranche 2 and Tranche 3. In fact, now we are focused on Tranche 4, which is going to expire in January of next year, and the upcoming auctions and all to secure that. So Tranche 2 and Tranche 3, we got, and we got it at reasonably good prices. I mean, it’s slightly higher than what we had, but not much.
Satyadeep Jain
And how much is Tranche 4?
Satish Pai
So, Tranche 4 is another 3 million tons, that will come up in January, largely in the NCL region. And we are working on securing that now.
Satyadeep Jain
Thank you so much and wish you all a Happy Diwali.
Satish Pai
Yeah. Thank you.
Operator
Thank you. Our next question is from the line of Kirtan Mehta from BOB Capital Markets. Please go ahead.
Kirtan Mehta
Thank you for this opportunity, sir. Going back on alumina, do you plan to enter into any long-term offtake agreement with the Middle East smelters that you’re talking about, or would you largely follow the spot model?
Satish Pai
No, we will do — we have already — with the expansion that we did in Utkal, we are signing annual to biannual contracts, which are indexed prices to LME. So, you get a percentage of LME price. So, we will be doing reasonable amount of longer-term contracts. No, we will not be doing — trying to sell 1.5 million tons on the spot market.
Kirtan Mehta
Right. Another related question was, we have seen sort of the alumina capacity expansion in China, and effectively, China turning into sort of an exporter rather than importer. So, looking forward to over, sir, say five years, seven years, do we expect alumina market to still remain in deficit globally with…
Satish Pai
See, it’s a little bit, as I was trying to explain, of a regional play. I don’t think that China will become a big exporter of alumina per se. I do know that they are sending a lot to Russia now, to RUSAL. But for us, the market that we are looking at is really the Middle East. And the Middle East, we will be tying up with longer-term contracts, which we’re quite happy to do.
Kirtan Mehta
Right, sir. Understood. One more question was about the — your accounts under the — entry under the comprehensive income, where we are indicating the effective portion of cash flow has a loss of INR2,272 crores. Could you explain what does that pertain to?
Unidentified Speaker
So, these are just MTM gains and losses on the cash flow hedges, which is the hedging that we take. And this basically reflects the movement of LME or the currency depending upon where [Technical Difficulty] So, this just goes to the other comprehensive income and it does not have a direct impact on our P&L, because it can change next quarter again.
Kirtan Mehta
This is the 5% hedge that we have taken for 2025, or the 25% hedge that we had for ’24, corresponding entries are here, mark-to-market?
Unidentified Speaker
So, it is for all the existing hedges that exist on the date of the balance sheet, or let’s say, the quarter end.
Kirtan Mehta
But apart from the aluminium price hedges, do we hedge any other component as well?
Unidentified Speaker
So, basically, it is LME, then we have currency hedges in certain cases, then we have sometimes the furnace oil. So, those are the hedges that we typically take. Commodity hedges, basically.
Kirtan Mehta
Is it primarily for the India operations or is it for Novelis as well?
Unidentified Speaker
So, it includes Novelis as well, because Novelis also takes hedges — these are offset hedges typically, for their operations, because they deal with aluminium.
Kirtan Mehta
Sure, sir. Thank you.
Unidentified Speaker
Yeah.
Operator
Thank you. Our next question is from the line of Pallav Agarwal from Antique Stock Broking. Please, go ahead.
Pallav Agarwal
Yeah. Good evening and good morning, folks. So, the first question was on the Novelis term loan that we’ve taken. So, given that interest rates are going up, so is it that the newer borrowings are at a higher rate of interest than the earlier ones? So, what exactly is the rationale for this new borrowing?
Devinder Ahuja
Yeah, so the…
Satish Pai
Yeah, go ahead.
Devinder Ahuja
Actually, this happened at a more favorable spread. It’s floating rate? So, you are right that right now, SOFR, and in general, interest rates are at elevated levels. But as far as the spread goes, we have refinanced our $750 million at a more favorable spread on SOFR. Now, we also believe that sometime starting middle of next year, interest rates would start coming down. But to your precise question, this has been refinanced on slightly more favorable terms. And the rationale is basically that this term loan would have matured in early 2025. So, we just wanted to refinance it well in time. So, that’s really what it is.
Satish Pai
The existing loan was also on a SOFR plus X basis point. Yeah.
Devinder Ahuja
Exactly. So, it’s had a more favorable spread on SOFR, basically.
Pallav Agarwal
Sure. Given that our credit metrics have improved substantially, so I guess, that would also help get a more favorable rate of interest.
Devinder Ahuja
Yes, you can say that.
Pallav Agarwal
Sure, sir. Sir, the other question was on the alumina expansion. Now, if I look at probably the Chinese cost of production of alumina, it’s probably north of $300. So, whereas we have very competitive cost of production at the Indian facilities. So, is that something of an arbitrage that can sustain going ahead as well?
Satish Pai
Yeah. I think the Chinese alumina, the existing alumina they have is [indiscernible], so it’s not — the high cost will remain and then they have to bring in bauxite from Australia and out. So — but you see, it’s not a market that we export to. So, the difference in alumina cost will remain, but it’s not something that was a part of our decision making. I repeat again, we looked at the market in the Middle East and which we are already selling to now based on the excess long alumina position we have.
Pallav Agarwal
Yeah. But just, that sets — that probably helps support global alumina prices as well, right, so the Chinese cost of production?
Satish Pai
Yes. And the way our contracts are built is as a percentage of the aluminium price. So, normally running at roughly 14% or 15%. So, it is also linked to how aluminium moves.
Pallav Agarwal
Sure, sir. So also, if you could just throw some more color on the aluminium pricing, because crude oil has come off significantly from the recent highs. So, even though it’s winter and probably natural gas prices could go up, but how do you see the energy cost push playing out in the short term with respect to aluminium prices?
Satish Pai
So, I’m sorry, I didn’t get your question. Energy costs in India or in Europe?
Pallav Agarwal
Globally. I’m talking about crude oil prices have declined pretty sharply of late. So, would that offset some of the cost push from higher natural gas prices?
Satish Pai
Not really. I mean, the — see, crude oil comes down, the linkage for crude oil to us is a little bit of a linkage to the furnace oil and furnace oil prices are also coming down, which is why I said in our Q3 cosmics, even if coal goes up a bit, CP Coke, furnace oil, caustic prices are down. So — and the natural gas prices, the only effect for us is Novelis in Europe, which has no real linkage to crude oil prices. That’s going to depend on how severe the winter is there.
Pallav Agarwal
Sure. Yeah. Thank you so much.
Satish Pai
Yeah. Thank you.
Operator
Thank you. Our next question is from the line of Rajesh Majumdar from B&K Securities. Please go ahead.
Rajesh Majumdar
Yes, sir. Thanks for the opportunity. Sir, I had a couple of questions. One is on the working capital side. We have seen a release of working capital in this quarter, which has aided in our capital expenditure. So, what is the outlook for that and whether we can see the same kind of run rate to complete our expansion project on time?
Unidentified Speaker
You’re talking about Indian operations or Novelis.
Rajesh Majumdar
Novelis.
Unidentified Speaker
So, Novelis, Dev, you want to talk about that?
Satish Pai
Working capital. Dev?
Devinder Ahuja
I’m sorry, I was on mute.
Satish Pai
Okay.
Devinder Ahuja
Yeah. So, we have a pattern where in the first six months of the year, we build inventory and we basically have use of cash when it comes to working capital. And in the second part of the year, most pronouncedly in the fourth quarter, we have a big release of working capital, primarily because of inventories going down. So, we build up using capacity in the earlier part of the year while shipments are more weighed towards the end of the year. And so, we have a release of working capital.
So, basically, what has happened this year is that there is a use of cash and the use of cash is related to buildup of inventory, number one. Number two, it is reduction of payables, because we had purchased metal and we are now processing that metal and we are not replacing that metal. And so, therefore we don’t build new payables. So, that is really the dynamic. So, it’s basically a seasonal dynamic that happens. In short, that’s really what it is.
Rajesh Majumdar
Right, sir. And sir, at the company level, guidance for capex for the next two years?
Satish Pai
So, look, I’ll let — Dev, yeah, go ahead and give the Novelis and I’ll give the India. Go ahead.
Devinder Ahuja
Sure. So, basically, at the Novelis level, we expect the capex now to be much lower than our earlier guidance. We expect the capex to be in the $1.5 billion to $1.8 billion range, $1.6 billion to $1.8 billion range. And most likely, it will be at the lower end of the range. So, basically that is what we are at right now.
Satish Pai
Yeah. And I think for India, this year, we will be between INR4,000 crores to INR4,500 crores. I think that for the coming year, we’ll give you that guidance probably in the February call once we firm up our plans.
Rajesh Majumdar
Okay, sir. And sir, my last question was what is our cost of production of alumina and the current derivation you’ve made for this quarter? Alumina?
Satish Pai
We don’t — both for aluminium and alumina, we don’t give you our cost of production. That’s a little bit of a comparative information.
Rajesh Majumdar
But alumina also, you’re in the first quartile? I’m just talking specifically to merchant alumina business in terms of COP.
Satish Pai
I think in alumina, it’s not just the first quartile, but the number one rated lowest cost in the world for the third party market itself from Utkal.
Rajesh Majumdar
And could you share the realizations for 2Q for aluminium and alumina, that you can share, in dollar per ton?
Satish Pai
Yeah. I mean, the NR realization, for — I think for alumina, it was — in Q2, was about $337 per ton was the metal bulletin price in Q2. And the aluminium NR for the quarter — do you guys have it handy? It’s INR199 per kg, the net realization of aluminium.
Rajesh Majumdar
Thank you so much, sir.
Satish Pai
Thank you.
Operator
Thank you. Our next question is from the line of Aditya Welekar from Axis Securities. Please go ahead.
Aditya Welekar
Yeah. Sir, thanks for the opportunity. On the aluminium downstream side, sir, do we expect higher shipments next year as our Sambalpur FRP will come online? And also correspondingly, our EBITDA per ton will improve, because in this quarter, it was almost flat sequentially despite the shipments rising by 15%?
Satish Pai
Yeah. We are running at about $220 per ton. So, what will happen is that the Silvassa extrusion, which is the 30 kt expansion we did and is ramping up, you will see all 30 kt of that coming next year. The Sambalpur, 170 kt of FRP will start sometime end of next year. So, you will only see that the year after.
Aditya Welekar
Understood. And the last one is if you can just confirm on the commissioning date of Bay Minette facility? And will it ramp up to the full 600 KTPA once it gets commissioned, or it will have some ramp-up time? And do we have all downstream facility to consume that 600 KTPA?
Satish Pai
Steve?
Steve Fisher
Yes. So, the commissioning time frame is late calendar year 2025. That is what we guided to last quarter as well. The 600 Kt, we have all finishing equipment to be able to supply primarily the beverage packaging and the automotive markets.
Aditya Welekar
Thank you.
Operator
Thank you. Ladies and gentlemen, that was the last question of our question-and-answer session. I would now hand the conference over to Mr. Pai for closing remarks.
Satish Pai
So, I just wanted to, again, reiterate that we had another steady quarter with great performance coming from Novelis, the copper business in India. And based on a good cost of production performance, the upstream aluminium business, even though LME was down 5%, we improved the EBITDA margin in Q1. So, with that, I thank you for your attention, and wish you all a very Happy Diwali. Thank you.
Operator
Thank you. Ladies and gentlemen, on behalf of Hindalco Industries Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.
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