Novelis to cut exposure to aluminum can price ceilings to 10%:COO

US aluminum sheet maker Novelis plans to reduce its exposure to can price ceilings to a maximum of 10% from a current 20%, offset with internal and external hedges, by the beginning of 2007, said Martha Brooks, chief operating officer, speaking Monday at the Desjardins Materials Conference in Montreal.

In 2006, 20% of Novelis' global shipments had a metal price ceiling, and this "did enormous damage to the company, costing us $350 million in the first three quarters of the year," Brooks told the conference, which was webcast. Much of that was offset by hedge positions, both internal and external, and $120 million of gains made on call options, she said.

"As a conversion business, we will not be satisfied until the entire impact [is] eliminated," said Brooks. "It's something we continue to work on, and we will obviously not be signing any future contracts with ceiling prices in them," she added.

Novelis in September filed a lawsuit against brewer and distributor Anheuser-Busch, alleging AB breached provisions of its supply agreement. It asked the court to excuse it from its supply agreement with AB or to enter a judgment finding that the pricing mechanism of the supply agreement should be reformulated as aluminum prices had skyrocketed.

Brooks added that the impact of foreign currency also impacted the company's bottom line. The impact of the Brazilian currency was $21 million year to date, partially offset by $6 million due to hedging about half of the cash flow exposure year to date. In the fourth quarter, Novelis has increased currency hedges to about two-thirds of the cash flow exposure. Also, higher energy and transportation costs accounted for more than $50 million in charges from 2005.

Novelis was implementing a new model for passing through energy and transportation costs, she said. "We are faced with unprecedented inflationary increases in input costs," said Brooks. "So we are pressing for price increases where possible."