Consolidation: Round Two activated

And in the second stage, management control was to be transferred to a strategic partner through disinvestment. Recent indications are that the disinvestment of around 28 per cent equity stake in Nalco is likely to precede the ADR/domestic offering.

From Nalco's current market capitalisation of Rs 7,200 crore, it is obvious that the conservative financial outlay for any serious bidder in the disinvestment has to be around Rs 2,750-3,000 crore (including an open offer for the remaining 12 per cent from the public).

The financial outlay will be even higher if the valuation is based on market capitalisation higher than Rs 7,200 crore or the Government decides to place a larger block of equity for disinvestment.

Similarly, to be a serious contender in the Nalco disinvestment, the A. V. Birla group has proposed the merger of the copper business of Indo-Gulf Corporation with Hindalco, subject to regulatory and High Court approvals. If this merger goes through, it is likely to provide Hindalco with both the size and greater balance-sheet strength for the Nalco disinvestment. Along with the merger, Hindalco has also announced that it is making an open offer to acquire the remaining 25.4 per cent equity from the shareholders of Indal and delist the company.

From the medium-term (three-five years) perspective, the Nalco disinvestment will be a winner-take-all kind of a battle between Hindalco and Sterlite (assuming that foreign aluminium majors do not participate in a big way).

It is not yet clear if Hindalco or Sterlite proposes to align with any leading global aluminium majors such as Alcan, Alcoa, Norsk Hydro or Pechiney at present.

Strategic implications

It is becoming quite apparent that the non-ferrous metals business (driven by aluminium and copper) in India will be a duopolistic market dominated by Hindalco and Sterlite.

From a strategic perspective, it appears that the aluminium majors perceive that non-ferrous metals (especially aluminium and copper) are likely to remain a `volume game' in the foreseeable future.

Primarily because "sluggish global demand" and "excess capacity" are likely to keep aluminium prices under pressure in the near-term.

In the medium-term, at the global level, technological innovations may contribute to a reduction in cash costs for greenfield/brownfield expansion, thereby putting downward pressure on average aluminium/copper prices across a full business cycle.

Second, in India, the rationalisation of the downstream segment in aluminium may take much longer to play out. Particularly, given the excess capacities in rolled products, extrusions and foils, relatively low demand for sophisticated/ customised products / solutions from domestic end-user segments and lopsided tariff structure favouring the primary metal segment.

Since this process of rationalisation may take at least one-and-a-half to two years to be completed and the scope for significant "margin improvement" may be limited. Till that happens, the volumes game may hog the attention of players in the non-ferrous metals industry.

In this backdrop, from a producers' perspective, the trends likely to dominate the non-ferrous metals landscape are:

Significant entry barriers: Going forward, the `size and `scale' of production capacities and considerable financial/technical strength are likely to pose substantial entry barriers for new entrants into the aluminium and copper industry. Bringing the entire metals industry under one roof (as envisaged by Hindalco and Sterlite) is poised to challenge even the entry of international aluminium majors into the country. If the Nalco disinvestment goes to either of these two players, it will create a major gridlock for all prospective (domestic and foreign) entrants into the non-ferrous metals industry.

Economies of scale: In aluminium and copper, Hindalco and Sterlite are slated to derive significant economies of scale in production. First, aluminium majors such as Hindalco and Nalco have leveraged their economies of scale to undertake major brownfield expansion (an additional 1.15 lakh tonnes by Nalco to be completed this year and 1 lakh tonnes to be added by Hindalco and completed by March 2003) involving financial and operational capability that can hardly be matched by others. These additions to capacity are helping the players play the `volumes game' more effectively even in a depressed market.

Price stability: In an oligopolistic market, characterised by the presence of a few mature companies (such as Hindalco or Sterlite), there is the possibility of greater price stability vis-à-vis a purely competitive market. With few players, players choose a live-and-let-live attitude instead of engaging in price wars and this enables them to enjoy stable prices and steady profits in the long run.

Pursue growth opportunities: Leaving aside the Nalco disinvestment, Hindalco and Sterlite are aiming to leverage their size and scale of operations (Hindalco through this merger; and Sterlite through its overseas listing, if the scheme of arrangement succeeds) to pursue future growth opportunities.

For instance, Hindalco has already chalked out a second phase in its aluminium expansion from 3.42 lakh tonnes to 4.14 lakh tonnes and an increase in the copper capacity from 1.5 lakh to 2.50 lakh tonnes.

It also proposes to scout for acquisitions in the copper industry and is open to mine acquisitions to reduce the dependence on imported copper concentrates.

Sterlite also has ambitious growth plans (such as copper and aluminium capacity expansion), which hinges on its ability to raise financial resources for the execution of these plans.

End-user perspective

The consolidation within the non-ferrous metals landscape is likely to be beneficial to producers in the long run, but the same cannot be said for the consumer or the end-user. To protect their interests, it is imperative to consider the following strategic issues:

Dominant player status: Assuming that Hindalco bags a strategic equity stake in Nalco in the proposed disinvestment exercise, it will control nearly 85-90 per cent of the production capacities of primary metal in the country.

Given the capital-intensive nature of the industry, the high entry barriers and greater price stability may prove to be counterproductive to the interests of the consumer/end-user. If Hindalco succeeds in bagging Nalco, its combined aluminium capacities (of Hindalco, Nalco and Indal) will make it one of the world's top 10 aluminium players. In addition, its production capacities at over 7.4 lakh tonnes will rank on par/higher than Rio Tinto, Dubal or Glencore, though considerably lower than almost 40 lakh tonnes of Alcoa and around 23 lakh tonnes of Alcan.

Even if Sterlite were to bag Nalco, the high entry barriers and possibilities of mutual interdependence between Hindalco and Sterlite may still exist.

It is important for the government to introduce adequate safeguards to ensure that the possibility of an abuse of monopoly power is completely ruled out.

Make FDI attractive/reduce import tariffs: Considering the country's enormous bauxite reserves, the concessions associated with foreign direct investment have to be made attractive to encourage global aluminium majors such as Alcan, Alcoa or Pechiney to set up greenfield alumina or primary metal capacities here.

To complement this policy, the Government must further lower the tariffs on aluminium or copper to ensure that the threat of imports keeps domestic players on their toes.

Send this article to Friends by E-Mail