India’s aluminium bellwether needs to work fast to increase capacity

January 21, 2021 3:30 AM

The country’s aluminium bellwether needs to work fast to increase capacity

The eastern state has the largest share of the country’s bauxite resources, as also of some other minerals.

By Kunal Bose

Why should Dharmendra Pradhan, who holds charge of the Union petroleum & natural gas and steel ministries, be publicly urging his Cabinet colleague Prahlad Joshi (Union coal and mines minister) to push through the long-deliberated expansion of the central-government-owned National Aluminium Company (Nalco)? (Nalco comes under the mines ministry.) The answer is not far to seek. From the production of bauxite to making of alumina and its smelting into aluminium metal, Nalco has all of its operations centred in Odisha. The eastern state has the largest share of the country’s bauxite resources, as also of some other minerals.

Pradhan is credited with the BJP’s meteoric rise in Odisha over the last few years. The party won eight of the 21 Lok Sabha seats in 2019 against one in 2014. More important, its vote share rose impressively to 38.4% from 22% during this period. Pradhan is well aware of the emotional attachment of Odisha’s people to the state’s iconic aluminium venture. In the early 1980s, when the central government set up the aluminium venture, with technology from Aluminium Pechiney of France that was subsequently taken over by Alcan of Canada to finally become part of Anglo-Australian mining giant Rio Tinto, Odisha (then Orissa) was hardly on the radar of the private sector. Nalco caught the imagination of the common man in the state as it stands out as an example of how harnessing of a locally-found natural resource for value addition in several stages could create wealth and large employment, directly and indirectly.

At the same time, though the PSU has ownership of high-alumina-content bauxite in abundance and the benefit of excellent logistics, including virtually cost-free transfer of the mineral from the hills of Panchpatmali at Koraput district to the alumina refinery at Damanjodi through a 14.6 km long conveyor belt, it has so far not displayed the initiative that will help it to catch up with the other two industry constituents, namely, Hindalco and Vedanta Aluminium, in terms of capacity building and development of value-added products (VAPs) that are not as exposed to price fluctuations at the London Metal Exchange (LME) as a primary metal. Being a politician, Pradhan could well feel the popular frustration with Nalco not delivering on its growth promises.

Joshi admits that there remains “a huge scope for stepping up the per capita consumption of aluminium in the country” underpinning the need to build new smelting capacity. The challenge for industry entities is to leverage the country’s rich endowments of bauxite and non-coking coal. According to the Indian Bureau of Mines, the country has bauxite resources of 3.896 billion tonnes, including proved reserves of 656 million tonnes. That Odisha will continue to be the epicentre of India’s aluminium industry—since it alone holds 51% of India’s bauxite resources—is taken for granted. Andhra Pradesh, with ownership of 16% resources, hasn’t been able to become an aluminium centre because repeated, violent agitations have scuppered efforts.

The country’s measly per capita aluminium consumption of 2.5 kg stands in stark contrast to the global average of 11 kg and 24 kg in China. As per Niti Aayog, lifting India’s per capita use to the global average will require an additional annual aluminium use of 16 million tonnes. That will make India the second-largest consumer of the metal after China. India presently has an aluminium smelting capacity of 4.1 million tonnes. During 2019-20, metal consumption was down 6% to 3.72 million tonnes.

Even while the industry here has the capacity to meet the local demand, except for some special alloys and VAPs, 2019-20 imports at 2.17 million tonnes—facilitated greatly by our free trade agreements with ASEAN countries through which China is often suspected to be re-routing the metal and foreign-origin scrap arrivals at very low customs duty—have forced our producers to become highly export-dependent. This, however, works to their disadvantage because LME-linked local aluminium prices include freight and import duty.

The government is well aware of the difficulties caused by high levels of import that, a couple of years ago, involved foreign exchange outgo of $5.5 billion or 1.1% of India’s total imports cost. Braving the import-related issues and land acquisition challenges, Hindalco and Vedanta have built large greenfield smelters. Commissioning of new smelters has taken the capacity of Hindalco to over 1.3 million tonnes and that of Vedanta to 1.75 million tonnes. Hindalco continues to enrich its VAP portfolio by committing increasingly larger quantities of primary metal to the making of flat rolled products, foils and extruded items. VAPs give much better EBITDA than smelted aluminium. After acquiring 51% of BALCO in 2001, Vedanta raised its smelting capacity to 600,000 tonnes from 345,000 by commissioning a new smelter.

Pradhan’s disappointment is that even while Nalco has for long been talking about building new large smelting capacity to take its capacity to over 1 million tonnes, the company has remained stuck with a 460,000 tonne smelter and a 2.275 million tonne alumina refinery even while it has enough bauxite resources to support much larger operations. From building a greenfield smelter either in a West Asian country or in Indonesia by transporting alumina from the Damanjodi refinery to creating one at a new site in Odisha, Nalco had considered several options over the past many years, but all came to a naught.

Joshi has now invoked the ‘Aatmanirbhar Bharat’ vision to say that Nalco will invest Rs 30,000 crore by 2027-28 so that the company once again secures its “rightful place” in the aluminium industry. The two most important components of Nalco’s development programme would be 500,000 tonne brownfield expansion of Angul smelter and installation of a new stream at Damanjodi alumina refinery that is expected to give an extra 1 million tonne capacity. Expansion in Angul, along with upping of amperage of the existing four potlines, will make Nalco an over-1-million-tonne aluminium unit.

The government has reinforced Nalco’s raw materials security by allocating of bauxite and coal deposits from time to time. All Indian smelters being run on coal-fired electricity have higher power cost than the ones in West Asia that are based on electricity derived from gas or in countries where hydel power is available aplenty. Nalco’s energy cost will come down once it starts drawing coal from Utkal D and E blocks. Allocation of the 75 million tonne Pottangi bauxite deposit will be supportive of refinery expansion.

The company has a number of VAP projects, including an aluminium park in the pipeline. A man of few words, Nalco’s new chairman Sridhar Patra has a big task—to ensure project implementation gains pace.

A former FT correspondent, the author is now India Correspondent of Euro Money publication Metal Market Magazine

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