 "Tom Albanese")
Earlier this month, Vedanta group company Balco decided to shut its aluminium rolling business at Korba and is now looking at backing up production at its Jharsuguda smelter. In an interview with Jyoti Mukul and Deepak Patel, Tom Albanese, chief executive officer, Vedanta Resources, describes how aluminium is dragging down the group's performance. Edited excerpts:
What caused you to close the Korba unit?
There is nervousness that the Chinese economy is slowing down rapidly and, if unchecked, could create problems. China consumes 40-50 per cent of the world's steel, aluminium, copper and other metals. For many years, virtually all the demand growth in resources and energy has been coming from the Chinese but their economy is shifting from being commodity-intensive to high-technology.
As far as the financial markets are concerned, there is a broader collapse of prices of certain commodities. It is, therefore, doubly important for us to focus on low-cost operations.
Why is aluminium in trouble?
Historically, as China ramped up its aluminium smelting capacity, it also consumed whatever it produced. For a number of reasons, including the fact that the Chinese have very large coal deposits, they chose to monetise coal by smelting aluminium. This has caused them to expand aluminium beyond their own needs. Chinese aluminium imports to India increased to 213,000 tonnes at the end of March 2015, which was 56 per cent of the total demand.
There has been a 30 per cent decline in the received price for aluminium this year for our smelters. It is a combination of the reduction in the London Metal Exchange price and a reduction in physical premium we have been receiving historically. This has made the business significantly unprofitable.
We still want to ramp up where it can help us. The Jharsuguda unit remains relatively low-cost even in this environment. We can make some money from it, but the Balco plant is in a very difficult state now. We are trying to protect our primary aluminium capacity and reduce our value-added production and at this stage defer any future expansion.
How has this affected you power plants?
Our original plan was to have the Balco power units run at full capacity. We received approvals in January for operation of 1200 mw. But in the current market, we will defer it. We will sell power only from our IPP units. We will be reviewing all our available assets of captive power units at Balco.
Did the first-quarter earnings fully reflect the downturn in aluminium?
We did not see the full impact. There will be significantly low earnings this year. In the second quarter the fall is quiet dramatic and this why the Aluminium Association is in discussions with the government for increasing the import duty. The average price realised was $2,100 a tonne in the fourth quarter, but has reduced to $1,800 in the current market. The price is considerably lower than the consolidated cost of production. None of our earnings is coming from aluminium. It is drawing back our earnings from other sectors.
Will you cut production at Jharsuguda and Lanjigarh? What effect will it have on employees?
The Lanjigarh facility is not optimised. It is not competitive in this environment. We had made an $8 billion investment in the aluminium business. What return we could have got with higher prices is difficult to come by in this market.
We are sensitive to the local community and our workforce. In Korba, we have been engaging with the community and employee unions. We have made the required notifications.
How will the resumption of iron mining in Goa help the company?
We are focussing on a cost structure that can provide us cash margins for exports primarily to the Chinese steel sector. As we come out of the wet season, we will be producing 5.5 million tonnes per annum, which is our allocated share of the total mining cap of 20 million tonnes in Goa. Over the past three years, Indian iron ore was replaced by new Australian production. We want to sell as much to Indian steelmakers but the product is not in demand.
How are the zinc and copper businesses doing?
Our copper business is doing quite well. Treatment charges have improved over the years. The performance of the copper business depends on the contracts entered into last year. In zinc, we have seen a softening of the market largely due to what is happening in China. We continue to invest in our zinc business in India and overseas.
Will declining crude oil prices lead to lower investment?
Falling prices have made us scale back oil development plans, but there has been a corresponding opportunity in reducing cost with service operators. Every dollar a barrel counts because of the large amount of royalty and cess-80 per cent of the additional oil price goes to government coffers. We are seeing a tax regime that was developed when oil was $110 a barrel. The government's take is quite high, making it difficult to expand our production.
