December 6, 2011

D BHATTACHARYA
Hon. President, Indian Aluminium Association
Managing Director, Hindalco Industries Ltd.
Vice-Chairman, Novelis Inc.
Presentation Structure

Global and Indian Consumption Trends

Changes in Business Environment

Trends- Challenges & Opportunities

Summing Up and Imperatives

2
Aluminium: Fastest growing metal

15.00
Growth Multiple

12.50 Aluminium
Aluminium
10.00
Copper
Copper
7.50 Steel
NickelSteel
5.00 Zinc Nickel
Lead Zinc
2.50 Tin Lead
Tin
-
1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010
___________________________________
Source: Updated from Barclays Capital
__________________________
Source: CRU , Barclays Capital
Aluminium has grown 12.7 times
while Steel 4 times, in last 50 years 3
Growth quickened in recent years
Projected Consumption
Growth

CAGR 5.0% CAGR

6.7%
CAGR 2.7%

61
mn t
41
mn t

2010 2016

_____________________
__
Source: Published reports
4
 Trends in key country markets
Primary Aluminium Consumption (mn t) and CAGR (% p.a.)
India USA
3.5 7 4%
10% 11% 4% p.a.
3 6
p.a. p.a. p.a.
2.5 5
18% 2 10% 4
p.a. 1.5 p.a. 3
1 2
0.5 0.6 1.6 2.9 1 6.3 4.2 5.3
0 0
2000 2010 2016 (P) 2000 2010 2016 (P)

Brazil Africa Middle East

1.6 0.8 3
7% 5% 8%
1.4 0.7 2.5
1.2 p.a. 0.6 p.a. p.a.
1 0.5 2
7% 4% 8%
0.8 p.a. 0.4 p.a. 1.5 p.a.
0.6 0.3 1
0.4 0.2
0.2 0.5 1.0 1.5 0.1 0.4 0.5 0.7 0.5 0.8 1.6 2.6
0 0 0
2000 2010 2016 (P) 2000 2010 2016 (P) 2000 2010 2016 (P)
India projected to be amongst the fastest growing markets
5
Return of growth in the US market projected
 What is driving this growth?
World Aluminium Consumption Pie by End-Uses (2010,%)
Machinery
Investment Transport
growth-driven Poised to gain from
Electrical light-weighting trend
Infrastructure imperatives
of emerging markets

Construction Packaging
Scope for material Potential to deepen
replacement penetration

Consumer Durables ______________________

Rising middle class in EMs _
Source: Industry estimates
Notwithstanding the present weak economic environment,
structural trends are in favour of aluminium
6
Per Capita Al. Consumption
Per capita Aluminium Cons. (kg)

World average
8 kg

______________________
Per capita GDP (USD)
_
Source: IMF, Industry est.

Even if India reaches half the world average by 2020, it would imply
aluminium consumption of 5.5 mn ton or, >2.5x the current level
7
 Indian Market: Still Evolving
India Aluminium Consumption Pie by End-Uses (2010,%)

Machinery Transport
Manufacturing policy Tremendous potential
positive due to auto growth +
deepening use

Packaging
Low base; scope to grow
Electrical
Main-stay of Indian Consumer Durables
market; reforms and Consumption story
investment in electricity augurs well
sector key to growth
Construction
To benefit______________________
from urbanization
_
Source: Industry estimates
Promising medium-term prospects for every user industry
8
India: Favourable Demographics
Urbanization trend in India (%)

40
34
30
28
26
19

1980 1990 2000 2010 2020 (P)2030 (P)

______________________
_
Source: Research reports
Chinas urbanization rate moved from 30% to 40% during 1995-2005;
its Al consumption rose 4x over this period from 1.8 mn t to 7.2 mn t

9
India: At an Inflexion Point
Favourable demographics
Rising middle class
Working age population
Urbanization

Imperatives for
infrastructure investment
Goal to raise share of
manufacturing in GDP
Low base for Al
consumption

10
But Aluminium Value Chain will have to
navigate through several changes in the
business environment

11
Presentation Structure

Global and Indian Consumption Trends

Changes in Business Environment

Trends- Challenges & Opportunities

Summing Up and Imperatives

12
Trends Challenges & Opportunities

Shifting trends posing new Challenges & Opportunities

Light-weighting /
Material substitution Cost pressures

Recyclability Eastward shift

Commodity - a
Sustainability significant asset class

13
Trends.. Challenges & Opportunities
Shifting trends posing new Challenges & Opportunities

Light-weighting /
Material substitution Cost pressures

Recyclability Eastward shift

Commodity - a
Sustainability significant asset class

14
 Bauxite Reserves concentrated in
few countries
Most potential lies in areas
China, 4% perceived to have high political
India, 4% risk

Based on expected growth in

mine production, Chinas
Vietnam, reserves will last only for next
9% 6/8 years
China exploring new
Brazil, Australia, reserves both within and
14% 23%
outside

India: Local issues creating

2010 World Reserves ~23 bn difficulties
tons
______________________
Source: Industry estimates

15
Natural Resource Challenges

Falling grades

Incremental
resources in
difficult
geographies
Resource
nationalism &
heavier taxation

Resource challenges : A Clearances and

natural corollary to rising local environment
demand & increasing
awareness

16
Relatively faster energy inflation
900

800

700

600 Coal (Aus): 508

500

400 Prices indexed to Jan 2000 = 100

Oil: 399
300

200

100
Al: 130
0
Jul-01
Jul-00

Jul-02

Jul-03

Jul-04

Jul-05

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10
Jan-06

Jan-11
Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-07

Jan-08

Jan-09

Jan-10

Jul-11
___________
Source: IMF
17
Carbon Legislations getting more
stringent
Carbon tax in Australia
Metal production cost estimated to increase by $250/ton by 2015
due to this factor
Larger offset requirements in Europe
Smelter closures expected in central Europe due to rising carbon
costs
Possibility of a carbon import tax on products imported into Europe
China phasing out old smelters to lower emissions and power
consumption
Regulatory changes in India
Perform, Achieve and Trade scheme
Renewable energy obligations

Adding to costs
18
Cost Curve moving up

Cash Business Smelter Cost (USD / ton)

Near-doubling of costs over the decade

______________________
_
Source: Research reports 19
 Capex intensity also on rise
Smelter capex intensity (USD / ton of aluminium capacity)

7000
6,757 6,316
6000
5000 5,970

4000
3,900 4,100
3000 3,500 ~3,000
2000
1000
0

__________________________
__ Ongoing / recently announced
Source: Compiled from reports

Long-run marginal cost estimates at around

$2,400-2,500/ton currently
20
Trends Challenges & Opportunities

Shifting trends posing new Challenges & Opportunities

Light-weighting /
Material substitution Cost pressures

Recyclability Eastward shift

Commodity - a
Sustainability significant asset class

21
 Others Alumina, Power & Labor form 80%
11%

Carbon
of total metal production cost
10%
Alumina, Power & Alumina Bauxite availability key to
Labour are the 43%
main components
alumina production
~ 80% of total cost
Power Power costs decide new smelter
27%
locations
Labour
9%

Aluminium production shifting from the west to east

Rising power costs in the west

Alumina prices and logistics

Higher environment-related costs

Stagnating Demand.
22
New capacities : Asia to dominate
China, Middle East and India to
account for >90% of capacity
addition during 2010-2016
Capacity addition (Mn tons)
18
16.9 World total
16 1.5 Others
14 2.0 ME
12 2.4 India
10 China

8
6
11.0
4
2
0
2010-2016
______________________
Shifts in production centres _
Source: Industry estimates
23
But each centre has few issues
to deal with

Good quality bauxite ? Tough local environment

India resources and potential ? Delays in land
for coal resources acquisition, clearances

Local demand ? Insufficient bauxite /

China advantage alumina
Fast implementation ? High power tariffs, power
availability concerns

Cheap and abundant ? Non-availability of local

Middle East
energy alumina

Region specific peculiar issues pose challenges

24
New pressure points

Structural appreciation of currencies in these

production centres

Chinese Yuan up 30% in last six years

_______________________________
_
Source: Pacific Exchange Database

Indian and Australian currencies also have a structural

appreciation bias, though have weakened at present
25
Trends.. Challenges & Opportunities
Shifting trends posing new Challenges & Opportunities

Light-weighting /
Material substitution Cost pressures

Recyclability Eastward shift

Commodity - a
Sustainability significant asset class

26
 Financing Deals
Arbitrage window opened in 2009
Tight physical markets
despite huge inventory
10
9 US MidWest ingot premium
8 (c/lb)
7

>
6
5
Storage 4
cost 3
2
1

Long-term Interest 0

Jan-07
Jun-07

Oct-10

Aug-11
Feb-09
Jul-09
Apr-08
Sep-08

Dec-09
May-10

Mar-11
Nov-07
Contango rates

______________________
Financing deals creating a paradox _
Source: Industry estimates

27
Impact of Financial Investors
Fund investment in commodities LME has become more volatile
has gone up consistently Std. Deviation of Daily
returns on LME Al. (%)

1.8
1.7
1.2

2003-05 2006-07 2008-11

Ascent of commodity as an asset class __________________________

_
has induced several complexities Source: HDFC Sec, Bloomberg
28
Whither fundamentals?
Correlation of
1999-2004 Since 2004
LME with:

Surplus / Deficit
-0.37 0.05
during the period

Consumption 0.75 0.55

Stock-Consumption
-0.83 -0.39
Ratio

Regression of LME on stocks ratio alone explains only 20% of

movement since 2004; Along with fund flow variable, 78% of movement
gets explained _____________________
_
Source: HDFC Securities
Robust risk management systems imperative
for every player in the Value Chain
29
 Inventory LME relationship
Average LME (USD/ton)

Q1,1999-Q4, 2008 Q1, 2009-Q3, 2011

Q3, 2011

_______________________ Reported stocks (days)

Source: Published research

Financing deals have vitiated the inventory-LME

relationship in recent years
30
 Current LME way below marginal cost

Aluminium is the only base metal that is trading below

marginal cost at present

153

Current LME 104

indexed to
($/ton)

Marginal Cost

207

88 104

When will LME catch up with fundamentals?

_______________________
Source: LME, various reports
31
Trends Challenges & Opportunities

Shifting trends posing new Challenges & Opportunities

Light-weighting /
Material substitution Cost pressures

Recyclability Eastward shift

Commodity - a
Sustainability significant asset class

32
Why sustainability is crucial?
Heavy energy-intensity; ~50% smelting capacity on
non-hydro energy

Generation of waste: red mud, fly ash, spent pot

lining, etc.

Remote locations ~ to remain close

to resources

But aluminium has

capability to help
environment through its
applications and re-use
properties

33
Positive initiatives by the industry

Energy intensity in smelting has PFC emissions have reduced

come down over years sharply
PFC emissions (kg F/ ton of
aluminium)

4.5
4 >4
3.5
3
2.5
2
1.5
1
0.8 <0.6
0.5 0.4
Also makes enormous
economic sense 0
2020
1990 2006
_______________________________ 2010
_ objective
Source: IAI, Aluminium Association 34
Addressing waste disposal challenges

Transformation of red mud pond at Belgaum using bioremediation

technology in partnership with TERI

Before Now

35
Addressing waste disposal challenges

Transformation of Fly Ash heap at Hirakud into an eco park

36
37
Trends.. Challenges & Opportunities
Shifting trends posing new Challenges & Opportunities

Light-weighting /
Material substitution Cost pressures

Recyclability Eastward shift

Commodity - a
Sustainability significant asset class

38
Leveraging Aluminiums Recyclability

Share of recycled aluminium

Aluminium can be recycled
has, however, stalled in last two
again and again without loss decades
of its inherent properties Recycled Al as % of total
production
Nearly 70% of aluminium
30
ever produced still believed ~28
25
to be in use ~25
20

Recycling requires only 5% 15

10
of energy and emits only 5% ~10
5
of GHGs compared to
0
primary production
1970 1990 2010
_____________________
_
Source: Beijing Axis, AAI
Green-consciousness likely to give a fillip to recycling in the
coming decades
39
Recycling needs a strong infrastructure

Collectors

Converters Dismantlers

Refiners and Metal

remelters merchants

Scrap
processors

40
 Role of Recycling uneven across
markets
Contribution of secondary aluminium in Aluminium Can Recycling Rate
total production (2010,%) (2009/2010,%)
98%
100%
93%
90%
80%
70%
64%
58%
60%
50%
40%
30%
20%
10%
0%
________________________________
___ US Europe Japan Brazil
Source: Beijing Axis, Industry estimates
Recycling intensity is a function of Market maturity, Consumption
profile, Recycling institutions and infrastructure; and R&D efforts of user
industry 41
Trends..Challenges & Opportunities
Shifting trends posing new Challenges & Opportunities

Light-weighting /
Material substitution Cost pressures

Recyclability Eastward shift

Commodity - a
Sustainability significant asset class

42
The Big Auto Opportunity

Aluminium is an asset for anything that travels

Cars: 1 kg of aluminium
replacing conventional materials
eliminates 20 kg of CO2 over the
vehicles life
Railway wagons can use upto 5
tons of aluminium / wagon;
investment recovered through
fuel efficiencies in 2.5 years
Al already accounts for 60-80%
of aircraft weight; its use
deepening further

43
The light-weighting phenomenon
North America: Al content in Pounds per Light Vehicle
- History and Forecast -
600
Driven by
Sheet
500
Pounds per Vehicle

400 Driven by Castings

300

200

100

0
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
__________________________________________
__
Source: Ducker Worldwide and The Aluminum
Association, Oct. 2011

Government regulations driving Al usage in auto industry

44
Its a win-win scenario

Aluminiums advantage over steel in auto industry

Weight of the Mass of Fuel economy improvement in
Body-in-white (kg) Miles per Gallon (MPG)

_________________________
_
Source: Aluminum Association
45
Presentation Structure

Global and Indian Consumption Trends

Changes in Business Environment

Trends- Challenges & Opportunities

Summing Up and Imperatives

46
Aluminium consumption poised for a bright
future

Urbanization
Earth-friendly
Light-weighting

Emerging
markets
47
Growth will have its own challenges

Most important priorities:

Securing resources
Resource challenges
A continuous drive to
improve the cost structure
Cost pressures
Enhancing sustainability of
Financialization operations
of LME R&D focus on energy
Carbon- and efficiencies
environment-related Robust risk management
challenges practices

Though Upstream industry seems to be under pressure at current

LME, markets will have to eventually catch up with fundamentals
48
But there are also interesting
opportunities

Aluminiums promise as metal of

Robust structural the future coming into play
prospects for Most important priorities:
emerging markets
Working with end-users to
Focus on develop applications that
sustainability in would realize Aluminiums full
auto/construction potential
Light-weighting / Recycling infrastructure and
Material substitution institutions in emerging
markets
Recyclability Focused market
development, especially in
emerging markets
Downstream industry has to be proactive to leverage
favourable mega-trends
49
India: placed at the centre of the
unfolding aluminium story

Abundant coal and

good-quality bauxite

Infrastructure
Robust growth imperatives
prospects

50
India at an inflexion point

> Doubling of capacity in next 5 years

Immense potential to catch up with global

trends: packaging, light-weighting, green
construction

10%+ annual growth in consumption in the

years ahead

All stakeholders must ensure that we do not fritter awaythis

enormous India advantage & derail the aluminium growth story
51
Thank you

52