Despite the benchmark aluminium price on the London Metal Exchange (LME) falling below the cost of production, metal producers in India are not cutting output, at least in the current financial year, amid hopes of revival in its price in the second half of the year.
This is important in view of the global majors, such as Alcoa, Rusal, Norsk Hydro and Rio Tinto having announced 1.8 million tonnes (mt) of accumulative production cuts to reduce the losses burden on their books.
The decision to continue with the existing production capacity by Indian aluminium majors assumes significance as a further fall in prices will make it unaffordable for them. Hope of price stabilisation and further rise in the international markets have also helped in postpone their decision.
A recent Barclays report says the average cost of production (COP) of aluminium by all major producers in India stands at $2,030. While aluminum producer Nalco’s COP works out to $1,920, that of Hindalco and Balco stand at $1,900 and $2,000, respectively.
The COP of Anil Agarwal-controlled Vedanta Aluminium Ltd (VAL) stands between $2,300 and $2,400 and is substantially higher than the rest of the players'. The company operates on bauxite and alumina sourced from the open market. It has signed a memorandum of understanding with the Orissa Mining Company for sourcing bauxite on a long-term basis from the latter’s proposed mining site in Lanjigarh. “We hope the bauxite issue will be resolved by the end of the year. Hence, there is no production cut planned as of now,” said Mukesh Kumar, chief executive officer, VAL.
Meanwhile, the aluminium prices on the benchmark London Metal Exchange (LME) slumped below $1,900 on June 21, and continues to stay between $1,850 and $1,910, due to lack of demand. The slowdown in global economies has reduced investment in the user sectors of transport, packaging and construction, which account for nearly 70 per cent of the global 42 mt consumption of the metal. The LME price has corrected by 26 per cent in the last one year from $2,480.
Hoping for a revival in aluminium prices, Nalco chairman B L Bagra said in a recent interview, “Aluminium may rise 10 per cent from the current level and surpass $2,000 in two-three months, due to subdued supply in the international markets.” “No production cut is currently in sight,” said a Nalco official.
Apparently, Coal India Ltd (CIL) has agreed to supply coal to Nalco, which is likely to help the producer cut its COP marginally. However, Nalco’s profit margin would continue to remain under pressure as CIL has ensured supply of only 60 per cent of its requirement.
While announcing the annual financial results for 2011-12, Debu Bhattacharya, managing director of Hindalco Industries, 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 2011-12. A Hindalco official added, “Despite economic headwinds, the balanced portfolio approach, low-cost operation and strong value-added businesses resulted in a commendable performance.”
Total production in India was reported at 1.24 mt during the first nine months of 2011-12. During the previous financial year, total aluminium output was 1.63 mt.