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Global and local impacts in India

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For over a decade, India’s National Aluminium Company (Nalco) was on an international mission to find an ideal site to build a 500,000 tpy smelter. Exploratory visits were made by its officials to countries in the Middle East and southeast Asia where energy costs are low. The company’s plan was to send its surplus alumina to the offshore smelter instead of selling it on the world market.
Nalco eventually focused on gas-rich Iran with good port connectivity. During prime minister Narendra Modi’s visit to Iran in May 2016, Tapan Kumar Chand, chairman of Nalco, signed a memorandum of understanding with the Iranian Mines & Mining Industries Development & Renovation Organisation for building a 500,000 tpy smelter with an appropriately sized gas-based power plant. The site chosen for the project was Chabahar Free Trade Zone.

But as negotiations began on gas pricing, the pattern of ownership and financing of the proposed smelter, the Indian government, in a sharp policy change, told Nalco to turn its attention from building a $2 billion offshore smelter to creating new smelting capacity in Orissa, where for over three decades the company has engaged in integrated operation – from bauxite mining to refining of alumina for the production of aluminium. Despite a few rounds of disinvestment, the government still owns 60.20% of Nalco.

As the majority owner, the government has given the message to Nalco management that in the quickest time possible it should become a 1 million-tonne-plus aluminium group with all of its capacity in the country like its two peers Vedanta Aluminium and Hindalco. Within the Indian aluminium industry's present capacity of 4.129 million tonnes per year, Nalco has a share of 460,000 tonnes. Vedanta has 1.74 million tonnes, Hindalco has 1.354 million tonnes, and Balco has 575,000 tonnes in which Vedanta and the government have ownership of 51% and 49%, respectively.

In response to the government’s new policy, Nalco has decided to add a new potline at its smelter in Orissa’s Angul district that will create fresh capacity of 560,000 tonnes. “Yes, we also have plans to build a 600,000 tpy greenfield smelter in Orissa. But that will not be taken up for implementation in the next five years till the brownfield smelter expansion is complete,” says Chand. The other priority for Chand, besides installing the new potline at Angul without time and cost escalation, is to create a high level of security in supply of raw materials such as caustic soda, coal tar pitch and aluminium fluoride.

“The preferred route for building downstream capacity in all these products is joint ventures with groups which will bring in technology and also funds. In a tie-up with Gujarat Alkalies and Chemicals, we are to build a 270,000 tonne caustic soda plant backed by a 130 MW power unit at Dahej in Gujarat. As for coal tar pitch, we are partnering with Orissa-based Neelachal Ispat Nigam,” says Chand. He hopes to find a joint venture partner for aluminium fluoride soon and he wants Nalco to have bigger deposits of coal and bauxite.
A spokesperson for the Indian Chamber of Commerce says that Nalco should ideally have expanding ownership of bauxite and coal resources in view of its major refinery and smelter capacity expansion programmes. “It has all its present operations in Orissa where its expansions too will happen. The coastal state in eastern India has a nearly 55% share of the country’s about 3.5 million tonnes of bauxite resource. Orissa also has 77.28 billion tonnes of India’s 315.149 billion tonnes of coal resource. Besides its new captive coal mines, Nalco should always remain in pursuit of winning adequate long-term coal supply linkages from the government-owned Mahanadi Coalfields to be spared the import of expensive fuel,” the spokesperson says. To keep its smelter operation “financially viable,” says Nalco’s Corporate Plan (2017-32), the cost of power should be below Rs3 ($0.046) per kWh.

Despite Nalco's refocusing on the domestic smelting of aluminium, Chand is launching the company on a global search for bauxite reserves. A team from Nalco will shortly visit Guinea, which has one of the world’s largest and highest-quality bauxite resources, to see if a suitably large deposit could be acquired. Chand says Nalco will also look at other leading bauxite-owning countries, including Australia and Brazil, for the acquisition of deposits. “We will only consider for overseas acquisition a sufficiently large reserve of good-quality bauxite to feed an alumina refinery of 1 million tpy capacity or more. We have rich experience in bauxite mining and alumina making in India,” says Chand. Nalco is already a very-low-cost producer of alumina.

In the meantime, JSW Steel chairman Sajjan Jindal’s interest in aluminium has come to the industry’s attention. In view of an abundance of bauxite, most of it gibbsite of high quality, and power-grade coal in the country, New Delhi should “come up with some policy” to promote the production in India of the world’s “second most consumed metal after steel” in a big way, says Jindal.
Jindal chairs a group that, besides owning 18 million tpy of steel capacity, has a fast-growing footprint in electricity and cement. He suggests that the government should form “special purpose vehicles (SPVs) to set up five ‘ultra-mega’ aluminium projects... and package them with domestic... coal and bauxite.” However, the Modi government appears to have no appetite to scale up its presence in the metals sector – in fact it seems that it would prefer to further scale down its existing shares of aluminium and steelmaking companies.

An industry official says that the reason businessmen want a role for the government in promoting big aluminium projects is for facilitating land acquisition, securing speedy environmental clearances and getting access to bauxite and coal deposits. In the past, many big project plans in India have been thwarted by protests over land acquisition, and failure to secure long-term supply linkages for raw materials.

Long-term potential
A Mumbai-based merchant banker notes that the JSW Steel group has become big in all “verticals,” be it steel, electricity or cement. He thinks the group’s interest in aluminium could extend to a 1 million-tonne-plus smelter at a single location like Vedanta. According to him, “The pace at which the economy is growing, and the government’s special emphasis on infrastructure development, the creation of 100 smart cities and promotion of electric vehicles, will create ideal conditions for India’s low 2.4 kg per capita consumption of the white metal to grow at a fast clip in the years ahead.”

As recently as 2015-16, Indian aluminium demand registered a growth of 14% – the highest in the world – though in the following year it fell to 1.5%, mainly due to dislocation in the economy caused by the demonetisation of high-value currencies in November 2016 and uninspiring industrial activity through 2016-17. According to Hindalco managing director Satish Pai, one redeeming feature of Indian aluminium during the year was the transport sector, which saw demand growth of 15%, but demand remained flat in other sectors for aluminium consumption.

Vedanta Aluminium CEO Abhijit Pati says that the Indian industry’s primary aluminium production could have been a lot more than 3.2 million tonnes in 2017 had imports not amounted to 1.6 million tonnes, including 900,000 tonnes of scrap, 300,000 tonnes of secondary and downstream products and 400,000 tonnes of primary metal. “We are telling the government that capacity use of local smelters stuck at 78% will improve if imports of scrap and secondary metal are discouraged by doing away with the differential rates of import duty on primary metal and scrap,” he says.

Primary aluminium invites an import duty of 7.5%, but scrap and secondary material imports attract a levy of 2.5%. Industry officials say that ideally all kinds of aluminium imports should be charged a uniform duty of 10% to plug what they say is the large-scale “malpractice” of bringing in primary metal as scrap. A commerce ministry official says: “There certainly is merit in smelter owners’ plea for a parity in import duty on primary and scrap metal. But as the arbiter, we have to strike a balance between the demands of primary metal producers and converters of scrap into aluminium products.”

While large aluminium imports are said to impact the optimal use of the Indian aluminium industry’s primary production capacity, Vedanta Aluminium, which does not have captive bauxite mines, is also forced to keep a portion of its smelting capacity idle because of difficulties faced in procuring bauxite and also alumina from local sources. “What an irony this is for a country that boasts of owning the world’s fifth largest bauxite resource,” says Pati.

Relief on bauxite supply is in sight for Vedanta, however. The state-government-owned Orissa Mining Corporation, which has recently opened a mine at Kodingamali, where deposits are an estimated 90 million tonnes, has decided to sell 30% of production through e-auction to parties within and outside the state. They could be producers of alumina or traders. The remaining 70% will be sold by way of a long-term linkage to a local group – a caveat being that the group will have to add value to bauxite within Orissa. Owners of rich bauxite deposits in the state, Nalco and Hindalco are not in need of a long-term linkage for bauxite from other sources so that leaves the Kodingamali field open for Vedanta.

OMC has decided that the floor price for the auction of bauxite will be the cost of production plus 50%. Supplies under long-term linkage will be made at the “weighted average price secured at e-auctions.” While such bauxite supplies will be a relief for Vedanta, their cost will be higher than for the two other groups with ownership of captive mines. “The challenge for us will be to overcome this disadvantage by running our smelter at very high levels of efficiency at all times,” says Pati.

Written by Kunal Bose

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