Base metal companies line up Rs 1.14 trillion capex as demand rises

Host of sectors pushing up need for metals; capital outlay significant by firms, say experts

Non-ferrous or base metal companies from Hindalco to Vedanta, Hindustan Zinc, Nalco and Hindustan Copper are increasing their capital expenditure (capex) outlays for the future as demand grows from user industries. Almost Rs 1.14 trillion of capex has been lined up between FY23 and FY29 by these firms, their recent announcements show, as sectors such as renewable energy, electric cars, beverage cans, electronic, cable and durable products and aerospace, push up the need for metals.

The need to increase the outlay, say experts, is linked in part to slower capacity expansion by metal companies in India and globally over the last few years due to price volatility and debt overhang.

Now, the scenario is changing due to a post-pandemic demand surge, supply-chain disruption owing to the ongoing Russia-Ukraine crisis and a better balance sheet position of companies in recent quarters, explains G Chokkalingam, founder and managing director (MD), Equinomics Research, which is prompting firms to undertake capacity expansion with renewed vigour.

Consider this: In March, Hindalco — the flagship metals company of the Aditya Birla group — said it will invest $8 billion (Rs 62,240 crore) in its domestic and foreign operations between FY23 and FY27, pumping in $4.5-4.8 billion (Rs 35,010-Rs 37,344 crore) in its US subsidiary Novelis, and $3.4 billion (Rs 26,452 crore) in India.

By May, the company had made a significant announcement in this regard, saying that it would build a new recycling and rolling plant in the US at an investment of $2.5 billion (Rs 19,450 crore). This had taken capex plans committed by Novelis alone to $3.4 billion (Rs 26,452), with four other new capex initiatives underway, including two in the US and one each in South Korea and China, Hindalco said during its Q4 results on May 26.

In a subsequent media call, Hindalco's MD Satish Pai said demand from categories such as beverage cans, aerospace, housing and construction was very strong, especially in the US, though demand from the automotive sector was sluggish, owing to the worldwide semiconductor shortage.

Vedanta, meanwhile, said during its Q4 results call it was planning to double its capex outlay to $2 billion (Rs 15,560 crore) in FY23 from $1 billion (Rs 7,780 crore) in FY22. This was aimed at augmenting metal and mining volumes as well as improving the output of value-added products. Vedanta’s subsidiary Hindustan Zinc, meanwhile, has set aside Rs 1,150 crore as capex for FY23.

“If you look at the last three-odd years, Vedanta’s outlay on capex has been around $1 billion. In that sense, the capex outlay for FY23 has been doubled to $2 billion," Ajay Goel, group chief financial officer, Vedanta, said, adding that it would be funded through internal accruals.

Nalco, a government-owned entity, which is into mining and production of aluminium and bauxite, has lined up a capex of Rs 1,800 crore for FY23. This is part of a larger capex plan of Rs 30,000 crore that the company has put in place, which will see it ramp up its bauxite mining, production and transportation as well as increase capacity of its captive power plant by FY28.

Hindustan Copper, another public sector undertaking that is only into the production of copper, has earmarked Rs 5,500 crore as capex that will come on stream by FY29 in phases. In a statement, the company said as the global economy pivoted towards green energy, the role of copper as the most efficient conductive material would grow.

"As the world moves towards net-zero carbon emissions, the role of copper for capturing, storing and transporting green energy will be indispensable. Hence, significant rise in demand for copper has been predicted due to the thrust on low-carbon economy," the company said.

This point is endorsed by Deven Choksey, MD at brokerage KR Choksey, who says the push towards green energy is driving up the use of metals such as aluminium and copper.

“At the same time, the outlook for metal prices remains firm in the medium to long term despite some correction (in prices) of late,” Choksey says. “This is giving metal firms the confidence to undertake capacity expansion since it’s an indication that demand remains strong,” he says.

Data sourced from the London Metal Exchange (LME) and Bloomberg, by BS Research Bureau, shows that in the week ended June 9, 2022, the price of metals such as copper, nickel, lead, aluminium and tin has risen in the range of 1.2-5.5 per cent, though the price of zinc has fallen by 2.7 per cent in the same period.

At the media call during Hindalco's Q4 results, Pai said he saw the demand for aluminium remaining firm in the future due to the overall push for electrification by the government and the need for sustainability among companies as well as stakeholders in general.

“The demand-supply situation for aluminium remains tight,” Pai said. “And as the economic situation improves in China following the lifting of Covid-19 restrictions, the price of aluminium will stabilise at $3,000 per tonne for the rest of the year,” he said.