Nalco may switch back to long-term contracts as alumina prices dive

The company had moved away from long-term deals with major buyers and began risking its surplus in the international spot markets, selling over 95% of its exportable alumina here

State-run producer National Aluminium Company Ltd (Nalco) plans to reboot its strategy on alumina sales in international markets.

Nalco has been risking all its surplus alumina in the spot markets, a departure from the previous strategy of clinching long-term contracts with major buyers. In the last fiscal year, the navratna company sold over 95 per cent of its exportable alumina in international spot markets as prices had rocketed to over $600 per tonne, bringing in windfall gains for the aluminium maker.

Riding on buoyant prices, Nalco had clocked its highest ever realisation of over $700 per tonne from alumina sales, even bettering the earnings achieved by the company in the heydays of commodity market boom. The levy of sanctions on U C Rusal by the US treasury and curbs on Norsk Hydro’s Alunorte refinery in Brazil had spooked markets, triggering shortfall in alumina prices.

But the lifting of sanctions on U C Rusal and Alunorte, the world’s single largest alumina refining complex en route to its peak rated capacity, has mellowed prices of the intermediate product. On a year-to-date basis, international alumina prices have tumbled by half to around $300, crimping margins for Nalco. Notably, Nalco logged a rare quarterly loss of Rs 28 crore in Q2 as muted prices eroded profitability. Over the years, alumina exports have propelled Nalco’s profitability, though the CPSE (central public sector enterprise) is still struggling to turn profitable from its aluminium business on account of escalating power and other input costs.

With both aluminium and alumina prices subdued, Nalco is contemplating to revive long-term alumina contracts with major global players.

“Hardly 0.3 million tonnes of our surplus alumina in FY19 was liquidated via long-term bilateral pacts. We preferred to sell an overwhelming quantity of alumina in spot markets as prices were on a roll. But given the sobering price trends of alumina, we may do rethink on our strategy and divert more quantum of alumina to long-term sales”, said a Nalco source.

Historically, alumina in the global markets has traded at 14-15 per cent of the spot aluminium prices. However, the supply shocks in calendar 2018 emanating from levy of sanctions on U C Rusal spooked the markets, leading to alumina prices rising to 30 per cent of spot aluminium price level. But the consistent slump in prices in calendar 2019 has led to alumina prices again falling to the level of 16 per cent of spot aluminium prices.

Despite being an integrated player, Nalco was negatively impacted by fragile alumina prices. The navratna company posted a rare quarterly loss of Rs 28 crore in Q2 of FY20 as tepid realisations from alumina exports and higher power costs crimped margins. Each year, Nalco ships over a million tonnes of surplus alumina to its overseas customers.