 "Hindalco looks at new ways to cut costs")
The cut by the Aditya Birla Group company has come at a time when smelter capacity use worldwide is down by a third and as Bharat Aluminium Co (Balco), part of Anil Agarwal’s Vedanta Limited, has started shutting its rolling mill at Korba in Chhattisgarh.
“One line at the Hirakud smelter has been shut, which could be a production cut of 5-10 per cent,” a Hindalco executive told Business Standard. “Though we expect global aluminium prices to bounce back in a few months, we will review the situation at Hirakud,” he added.
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Aluminium hit a six-year low of $1,475 per tonne last month. Prices and premiums have tumbled in the past few months on concerns over a slowdown in China, the largest consumer of the metal. Aluminium prices, hovering at $1,600 per tonne on the London Metal Exchange, are expected to move up on global production cuts.
Analysts said Hindalco’s decision was right, but they were not convinced about the immediate gains. “Hirakud may have been making losses and so it makes sense to reduce output,” said Giriraj Daga, senior analyst with SKS Capital & Research. “It would make more sense if they sell alumina directly in the market instead of producing aluminium,” he added.
Hirakud, a much older plant, has a cost of production $150-200 (Rs 10,000-Rs 13,200) per tonne higher than Hindalco’s new smelters, Aditya and Mahan, according to analysts.
The cost of power is usually 13-14 per cent higher in new smelters. Hindalco has thus seen its energy costs zoom in the first quarter of 2015-16 by 45 per cent to Rs 1,644 crore from the corresponding period quarter a year ago. Hindalco produced 264,000 tonnes of aluminium in the June quarter against 190,000 tonnes in the corresponding period a year ago as the Mahan and Aditya smelters ramped up, the company said in its earnings release.
“The Aditya and Mahan smelters added to the total production of the company but at a higher cost,” said an analyst with a local brokerage.
Also, before de-allocation of coal mines, Hindalco had a captive coal supply from its Talabira-I mine in Odisha. Now the company has captive sources for just 30 per cent of its coal requirement, costlier than the earlier captive coal. The balance 70 per cent has to be sourced via imports, e-auctions and through linkages, which have also increased its energy costs in the last few months. The company has a coal requirement of 15 million tonnes.
Hindalco’s Hirakud facility is its oldest plant, set up in 1959. The smelter’s capacity is 161,400 tonnes. Apart from the Hirakud facility, Hindalco has a fully integrated plant at Renukoot in Uttar Pradesh and has recently ramped up the 360,000 tonne Mahan smelter in Madhya Pradesh.
Its Aditya smelter, another 360,000 tonnes, has also completed 55 per cent of its ramp-up and is likely to be operational this financial year.
“If there are more production cuts, these will not be at the Mahan or Aditya smelters as these plants are more efficient and their cost structures enhance the company's competitiveness,” said the Hindalco executive. “These smelters produce premium products and sell at premium prices, hence no cuts are likely at these plants,” he added.
Analysts, however, are not sure if the moves will really lead to gains and say higher reliance on non-captive coal will continue to keep the cost of production high for the company, which may also lead to a delay of ramp-up at the new smelters. Global aluminium prices should be at $1,900 per tonne for a domestic aluminium producer to have its smelters ramped up and running at full capacity, they said.
Apart from weak fundamentals, debt is another issue Hindalco has been dealing with. In March 2015, Hindalco’s standalone debt was Rs 29,000 crore, while the consolidated debt was Rs 68,467 crore. The company recently had the average maturity of its rupee project loans extended by 10 years.