 "In spite of reverses, Anil Agarwal has big aluminium plans")
The announcement baffled many - Agarwal has maintained that it's a struggle to keep the Lanjigarh refinery afloat amidst acute raw material shortage. The refinery, located in the backward Kalahandi district, was built in August 2007 on the assurance of bauxite from the nearby Niyamgiri mines of Odisha Mining Corporation. But due to protracted protests by local tribes and green activists, the Union ministry of environment and forest withdrew the mining clearances, dealing a severe blow to the Lanjigarh unit which now runs on bauxite sourced outside the state. The Lanjigarh alumina refinery, as well as the aluminium smelter at Jharsuguda, is currently running at 25 per cent of their installed capacity, Agarwal said at Bhubaneswar.
If it is so, what is the logic behind going for capacity expansion, especially when there is no solution in sight to overcome the bauxite issues? "On the surface it may look queer. But it is the global outlook for alumina/aluminium that has encouraged Agarwal to go for capacity expansion even without any raw material security," says R P Panda, an analyst. With the LME (London Metal Exchange) prices of aluminium hovering around $2,100 per tonne, up from $1,700 a year ago, it is viable to go for the expansion even with imported bauxite, he reasons.
Work in progress
"Most of the equipment for the expansion had been procured and 50 to 60 per cent of the construction work was over," says a company official. Instead of letting the equipment rust, it is prudent to go ahead with the expansion and make some money in the current bullish market, particularly when the project has received the nod of the locals at a recent public hearing for environment clearance, he adds. "As Vedanta wants to unblock its idle smelter capacity at Jharsuguda and attain two million tonne output in next couple of years, it needs more alumina and that necessitates the expansion of Lanjigarh plant," Panda adds.
Though the LME price of the metal hovers around $2,100 dollar per tonne, there is a premium of $300-400 for quality and other product parameters. This brings the selling price of aluminium to about $2,500 dollar per tonne, when the cost of production, even with imported bauxite, is pegged at $1700-1,800 per tonne. Hence, there is good amount of incentive to push for expansion, without much of fresh cap-ex burden. Had the company owned a bauxite mine, the cost of production would have been further down: around $1,200 per tonne. This underscores the substantial profits other aluminium makers, especially those with captive mines, are making in these good times, Panda says.
With the present capacity and constraints, the company has stepped up efforts to increase the output of Lanjigarh refinery, which now meets 60 per cent of the alumina requirement of the operational smelter at Jharsuguda. The company imports about one million tonne of alumina to feed the Jharsuguda and Korba smelters. If the idle 1.25 million tonne aluminium capacity at Jharsuguda is operationalised, the alumina requirement would go up further. Even after the doubling of the Lanjigarh plant to two million tonne in about a year, the company would still be importing about two million tonne of alumina to produce its projected two million tonne of aluminium per annum.
Depending on imports
Can this state of running the plant on imported bauxite (for alumina refinery) and alumina (for aluminium smelter) be sustainable in the long run? "No," says Agarwal. The metal market is cyclic in nature. The LME metal price could be high now. But when it comes down, it will not be viable to operate without captive mines. "Moreover, the Odisha government had assured to give us raw material linkage, based on which we have invested in the state," adds Agarwal. After being denied the promised Niyamgiri bauxite deposits, Vedanta had applied for 26 alternative mines in a radius of 50 to 60 km of Lanjigarh. There is no progress on that. Only recently, the state government has assured the company to give a small mine at Majhingamali, holding just 20 million tonne of bauxite, but the necessary recommendation to the Centre in this regard is yet to be made. The government, meanwhile, has allotted three laterite (rocks with low alumina content) mines in the Koraput district with a combined deposit of three to five million tonnes, which can at best meet the Lanjigarh plant's one year requirement at the present capacity.
In this backdrop, Vedanta pins its hopes on an arrangement with Larsen & Toubro (L&T) to overcome the raw material issue. Two years back, it had bought Dubal's stake in a joint-venture of L&T that was allotted prospecting license for the Sijimali and Kutrumali bauxite deposits in Odisha, which have reserves of close to 300 million tonne. Through this pact, Vedanta wanted to source bauxite for its Lanjigarh plant. However, the state government is yet to approve the idea, as it holds that the mine was allotted to L&T for setting up of an alumina refinery, so the bauxite from there cannot be diverted to another plant. However, some legal opinions have favoured the L&T-Vedanta pact. The government is still examining the proposal. Particularly, with the past allegations of the Opposition about the government showing favours to Vedanta, the government wants to play it safe.
More trouble
Similarly, revving up the idle aluminium capacity in Jharsuguda SEZ is also fraught with trouble. The Odisha government is not allowing Vedanta to use the power generated at its 2,400 Mw plant, sitting next to the smelter, on the ground that the project is an Independent Power Producer and not a Captive Power Plant. The state government has slapped a cross subsidy surcharge of Rs 1.58 per unit for use of the power for the smelter, forcing the company not to go for commercial operation and keep the 1.25 million tonne aluminium capacity idle. "If we pay the surcharge, it will have an annual impact of Rs 800 to Rs 1000 crore per annum, which is unviable," says a company official.
The company, meanwhile, has approached the government with a request to slash the surcharge rate and hopes an amicable solution to the issue will be reached, which will help revive the idle capacity.
In his presentation before the chief minister, Agarwal emphasised on the benefits to accrue to the state if the problems related to power supply to smelter and bauxite linkage are resolved. He said Vedanta has made a cumulative contribution of Rs 4,030 crore to the Odisha exchequer. In the last fiscal, it made a contribution of Rs 750 crore. If the alumina/aluminium operations are ramped up to full capacity, the contribution could go up to Rs 2,500 crore per annum. Similarly, the direct and indirect employment in the company's facilities at Jharsuguda and Lanjigarh, which is about 25,000 now, would go up to 100,000. Besides, this will trigger 100 downstreamindustriescreating another 100,000 jobs.
Maybe Vedanta, with its grand expansion plans despite the odds, will show the way to realise the goal.