Hindalco Industries Ltd, the Aditya Birla Group’s most profitable company, last year bought Novelis Inc., the world’s largest aluminium can maker, for $6 billion (Rs. 25,740 crore). Debu Bhattacharya, Hindalco's Managing Director, has transformed the company from a traditional metal producer into an integrated company that sells cans to beverage makers Coca-Cola Co. and PepsiCo Inc. and aluminium sheets to aircraft builders Boeing Co. and Airbus SAS. In an interview on Indian metal makers’ quest to buy both mines and metal companies abroad, Bhattacharya said commodity companies have to invest in research and development to survive. Edited excerpts:

Indian companies continue to buy mines and metal companies even when commodities prices are riding high. What has your experience been after Hindalco purchased Novelis?
Novelis is a strategic fit for Hindalco. We wanted to grow upstream (with value-added products) to ensure sustainable profits. Producing primary metals (downstream) and value added products are like chalk and cheese.

For value-added products like cans, we needed to have technology and customer acceptance. Neither can be purchased from the market. Even if we invest time and develop technology, there is always a fear that it may not succeed.

We have learnt many things from Novelis. We began with cultural integration, followed by finance and technology, and now marketing. For example, the energy efficiency of their plants was far better than Hindalco’s. No steamroller approach will work in such cross-border integration.

With Novelis, Hindalco has spread across the globe and our portfolio of products is a natural hedge to the volatility of aluminium prices. We can bring Novelis’ technology into India and make cans and sheets for Indian consumers. The benefits of the purchase have started to flow in and will be reflected in our annual result.

There is a belief that the global shortage of raw materials (mines) is driving up metal prices. Indian companies are, therefore, paying a scarcity premium to lock up these assets. Do you believe so?
This is not entirely true. But, the number of mines cannot keep going up because these finite elements cannot be manufactured. Low-cost mines (with low quality of ore) are available on the decline of the commodity cycle. Those with higher quality (ores) will wait for the commodity cycle to peak for a better price.

Nobody buys mines as and when available. Valuation is done for a longer horizon and today’s price may not get translated after 10-15 years. Commodity prices are high and, therefore, commodity companies have the cash to buy such assets.

For instance, take copper mines, which are scarce in India. Nobody invests in a country; they invest in an opportunity. The economic value of a mine depends on many risk factors — political and natural. How soon economically we can bring back the raw materials and integrate them back home is the challenge. Aditya Birla Minerals, which owns two copper mines in Mount Gordon and Nifty in Australia, sells copper ore to Hindalco at market price. And Birla Copper receives a consistent and cost effective source of copper. We have also learnt the mining business and that knowledge is very useful. We have also locked up reserves for next 10-12 years.

The Chinese government has been a facilitator for their domestic companies buying raw materials abroad. There are reports of China offering to build infrastructure such as rail networks, roads and ports in foreign countries, in exchange digging out ores. Can the Indian government, too, help local companies?
In a way, yes. China is a large economy that is growing at a rapid pace. So, they need raw materials to feed their plants. Their companies have strong attachments to the government, which continuously evaluates the market and changes policies to meet the needs of the industry. I have no comments on the Indian government’s role.

Novelis has a bridge loan of $3 billion. It has to pay $1.4 billion to bond holders next year. Have you thought of how to repay this?
We can always refinance it.
(Hindalco is meeting on 20 June 2008 to consider a rights issue of shares to refinance the bridge loan. Long-term funds to replace the loan must be in place by 10 November.)