Despite the benchmark aluminium price on the London Metal Exchange (LME) falling below cost of production, metal producers in India are avoiding output cut at least for the current fiscal amid hope of revival in its price in the second half of the year. This is important in view of the global majors including Alcoa, Rusal, Norsk Hydro and Rio Tinto have announced around 1.8 million tonne of accumulative production cut to reduce the loss burden on their books.
The decision to continue with the existing production capacity by Indian aluminium majors assumes significance as further fall in prices will make it unaffordable for them. Hope of prices stabilizing and rising further in international market has also helped postponing their decision..
A recent Barclays report says that the average cost of aluminium production (CoP) in India stands at $2,030 by all major producers. While Nalco’s CoP works out to around $1,920, that of Hindalco and Balco stands at $1,900 and $2,000 respectively.
The CoP of Anil Agarwal controlled Vedanta Aluminium (VAL), however, between $2,300-2,400 is substantially higher than rest of players as the company operates on bauxite and alumina sourced from open market due to the lack of these raw material support. The company signed an MoU with Orissa Mining Company (OMC) for sourcing bauxite from it on long term basis from the latter’s proposed mining site in Lanjigarh which is facing huge resistance from local people.
“We hope that the bauxite issue will be resolved by the current financial year-end. Hence, there is no production cut planned as of now,” said Dr Mukesh Kumar, CEO of VAL.
Meanwhile, aluminium price on the benchmark LME slumped below $1,900 on June 21 and continuing sustainably between $1,850 and $1,910 due to the lack of demand from consumer industries. The slowdown in global economies has reduced investment in user sectors like transport, packaging and construction, which account for nearly 70% of the global 42 million tonne consumption of the metal. LME price has corrected by 26% in the last one year from the level of $2,480.
Hoping a revival in aluminium prices, Nalco chairman B L Bagra said in a recent interview, “Aluminium price may rise 10% from the current level and surpass $2,000 in 2-3 months due to subdued supply in the international market.”
“No production cut is currently in sight,” said a Nalco official. Apparently, the public sector Coal India (CIL) has agreed coal supply to Nalco which effectively is likely to help aluminium producer to cut CoP marginally. However, the company’s profit margin would continue to remain under pressure as CIL has ensured supply of only 60% of Nalco’s coal requirement.
A squeeze in profit margins have forced a lot of aluminium capacity to put on hold as the price of the metal is on the wane while the raw material costs are on the rise.
Rising energy cost is a matter of concern as energy alone contributes nearly 65% of CoP.
While announcing the annual financial result for FY12, Debu Bhattacharya, managing director of Hindalco Industries had said, “The aluminium business could take a beating this quarter because the situation is much worse than what was prevalent in the fourth quarter of FY12. Going forward, the aluminium business could have an impact on margins.”
A Hindalco official commented, "Despite economic headwinds, the balanced portfolio approach, low cost operation and strong value added businesses resulted in commendable performance. With low cost advantage and formidable global presence in aluminium downstream, Hindalco is well set for being the Last Man Standing and the First Man Forward."
Total aluminium production in India was reported at 1.24 million tonne in the first nine months of the FY12. During the previous financial year, however, total aluminium output was recorded at 1.63 million tonne.
