Can a new aluminium smelter do without a coal block?

No longer does the presence of abundant bauxite alone make a destination attractive for aluminium smelting. This also holds good for India, which has bauxite resource of 3.48 billion tonnes, including reserves of 593 million tonnes (mt). According to the Indian Bureau of Mines, 72 per cent of the resources have alumina content of 40-50 per cent. In case Indian and foreign investors do not get access to cheap power, they wouldn't be inclined to go beyond building refineries to make alumina, the feedstock for smelters.

In India, a new smelter would remain globally competitive provided it is backed by a captive power complex and, in further upstream, by a coal block. This is because power and fuel, accounting for the single-largest cost element in making aluminium, have a share of 35-45 per cent in the production cost. The share of electricity would depend on energy sources such as natural gas, plentiful in West Asia and in the US; coal (the acquisition of deposits by smelters here remain mired in controversy); and hydel, which powers many units in Canada and Europe. Power rates, which vary from country to country and, in a big country such as China, from province to province, and smelter efficiency would also have an important bearing on the costs of making aluminium.

POWER STRUGGLE

• The 3-month aluminium price on LME is lower than $1,850 a tonne; the aluminium inventory there stands at 5.4 mt
• A fall in premium began in July, when LME, responding to long queues for deliveries at its warehouses, proposed changes in rules
• US, European premia are down 15% since July; consumers are postponing signing contracts with producers for supply in 2014

In fact, as the three-month aluminium price on the London Metal Exchange (LME) is below $1,850 a tonne and the aluminium inventory there stands at 5.4 mt, smelters with high power bills from China to Europe and the US are finding it difficult to continue production. Smelters are also contending with the fall in premium, which decides the cost of physical aluminium, over and above futures prices. The fall in premium began in July, when LME, responding to lengthening queues for deliveries at its approved warehouses, proposed changes in rules. Ahead of that, as queues started at LME warehouses in the second half of 2009, the benchmark US premium rose from $93 a tonne to a record $265 a tonne. Not only are the US and European premia down about 15 per cent since July, consumers are postponing signing supply contracts with producers for supply in 2014, hoping premia would fall further. Metals consulting firm CRU says now, financial players, somewhat unnerved by LME warehouse proposals, are "less inclined to make fi
nancial deals". However, warehouse queues being close to record levels, premia have not fallen any faster. The fact is if it wasn't for the high premia, a much larger global smelting capacity, compared with 25-30 per cent, would have been in the red.

  Hindalco Chairman Kumar Mangalam Birla has said, "As world aluminium prices continue to remain weak," smelters would face challenges in the near term. High levels of efficiency through the production chain-from bauxite mining to value addition to primary metals-enabled Hindalco to perform significantly better than most of its peers through the past four difficult years. Last year, the company's capacity to negotiate economic headwinds was evident, largely due to the sales of 240,000 tonnes of value-added products out of its primary aluminium production of 542,000 tonnes. This would now be further reinforced with the recent commissioning of the can-body stock project, thanks to the transfer of the idle Novelis plant and equipment in the UK and in Hirakud in Odisha. A breakthrough venture for India, the Hirakud facility, would lead to import substitution.

The reputations of Hindalco or National Aluminium Company (Nalco) of being among the world's lowest-cost producers are history. If either of the two is to build a new smelter, it would do so only if it secures a coal block to support the running of the captive power complex. Coal linkages, as is the experience of the aluminium industry, irrespective of whether a smelter is in the public or private sector, haven't proved to be of much help. Often, the required quantities of coal wouldn't be available and the quality would invariably leave users disappointed. All this would leave aluminium producers with no alternative, but to import coal or buy the fuel from auctions at much higher costs.

Because of operational efficiencies, the depreciated smelters are managing to stay in the black, despite rising coal costs. Since Indian aluminium prices are LME-derived, along with customs duty and freight, the fall in the rupee has helped local smelters. Now, securing a coal block is, however, de rigueur for any entity building a highly capital-intensive smelter. Hindalco's investments in Aditya Aluminium and Mahan Aluminium, each with smelting capacity of 360,000 tonnes, would find justification only when mining in the assigned coal blocks starts. Hasn't Nalco said its investment of Rs 16,450 crore in a 500,000-tonne smelter, backed by a 1,260 Mw-power complex, is conditional to securing a coal block? In 2012, the demand for aluminium rose nine per cent. And, demand would only rise from here. Let coal-block denial not stand in the way of smelting capacity addition.