Not only have they earned record EBITDA, but the three groups also made more aluminium in the quarter year-on-year as they further brought down production cost, principally by reducing energy consumption.
By Kunal Bose
The two aluminium makers in the private sector and also the one, majority owned by the central government, have all done exceedingly well in the first quarter of 2021-22. Not only have they earned record EBITDA, but the three groups also made more aluminium in the quarter year-on-year as they further brought down production cost, principally by reducing energy consumption.
A highly energy intensive industry, coal-fired electricity and crude derivatives constitute between 45% and 50% of aluminium production cost in India, followed by smelter feedstock alumina at 31%. Smelters in Europe and Canada using hydropower and the ones in West Asia run on electricity by burning natural gas have a natural cost advantage over the Indian industry with capacity to smelt over 4.1 million tonne of silvery white metal.
While high LME aluminium prices, efficiency improvement and greater rates of conversion of primary aluminium to value added products (VAPs) allowing better product mix helped Hindalco and Vedanta to lift their EBITDA to an all-time high, in the case of government owned National Aluminium Company (Nalco) proceeds from exports of intermediate product alumina for which the global demand remained firm also made significant contribution to bigger first quarter turnover and profits.
Unlike Hindalco, which uses up most of the alumina it produces to feed its four smelters with capacity of 1.3 million tonne and Vedanta, which in the absence of ownership of very large bauxite deposits is required to buy both the mineral and alumina in large quantities from the domestic and foreign markets to support smelting operation at Jharsuguda in Odisha and Korba in Chhattisgarh, Nalco, being hugely surplus in alumina is annually exporting over 1.2 million tonnes of the chemical.
Being among the world’s lowest cost producers of alumina, chemical exports have always enriched Nalco revenues and profits. Like Nalco, the ownership of rich alumina content bauxite deposits at Baphlimali hills in Odisha and a robust infrastructure, including virtually cost free transfer of bauxite to the refinery in Rayagada district through a 19.5 km conveyor belt have made Hindalco’s Utkal Alumina a highly cost efficient producer of smelter feedstock. Vedanta, on the other hand, tries to make good the disadvantage of being largely dependent on external sources for bauxite and alumina by pegging smelter operational efficiency at a very high level, says Abhijit Pati, CEO of BALCO, which is 51% owned by Vedanta.
Even while the domestic industry has built capacity to largely meet local demand for aluminium, except for a range of high tech alloys and critical VAPs, year after year imports, including scrap are having an overwhelmingly majority share of Indian market. This is forcing the local industry to sell a lot more aluminium in the world market than locally.
As imports continue to appropriate a big chunk of domestic market, Indian primary producers want besides high tariff barrier on scrap imports to subject such imports to rigorous quality check. At the same time, they feel their competitiveness will improve in case the import duty on critical raw materials such as petroleum coke, caustic soda and alumina is reduced. The government has to ensure that secondary aluminium producers are not starved of scrap till such time domestic generation picks up sufficiently to make imports redundant.
Whatever difficulties they may be enduring, local primary producers should not get distracted from the reality that India’s per capita consumption of aluminium will have to rise sharply from the present low of 2.7 kg when prime minister Narendra Modi has floated the idea of India becoming the world’s third largest economy of a size of $10 trillion. After all, the world average per capita consumption average is 11 kg and the Chinese per capita use is 24 kg. A Niti Aayog paper says, for India to brace the global average per capita use of 11 kg, it will require an additional annual consumption of 16 million tonnes and that will make this country the world’s second largest aluminium user after China.
No wonder then, all the three local industry constituents have decided to pursue major capacity expansion programmes either in primary metal or in VAPs. More recently, Vedanta has said it will make BALCO a nearly 1 million tonne smelter by building new capacity of 414,000 tonnes over the next 18 to 24 months. Post this expansion Vedanta, including its facility at Jharsuguda, will become a 2.8million tonne aluminium group. At the same time, Vedanta is expanding the capacity of Lanjigarh alumina refinery from 2 to 5 million tonnes to meet incremental requirements of feedstock for its two smelters.
Hindalco remains focussed on expanding its VAPs portfolio to protect itself from fluctuations in LME metal prices. Hindalco managing director Satish Pai says: “Over the next few years, as part of our downstream strategy, we intend to enhance our VAPs capacity from over 300,000 tonnes to over 600,000 tonnes.” Much before Sridhar Patra was appointed Nalco chairman in December 2019, the company had announced the building of a greenfield 600,000 tonne smelter and expansion of alumina refinery capacity by 1 million tonnes.
(A former FT correspondent, the author is now India Correspondent for Euro Money publication, Metal Market