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Avoidable brakes on India's aluminium capacity growth

As aluminium prices are moving towards $1,800 a tonne, 30% of the world capacity stands unviable

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At over three billion tonnes (bt), India has the world’s fifth largest deposits of bauxite, the mineral which on refining becomes alumina for highly energy intensive smelting into aluminium. As it would happen, as much as 55 per cent of this national resource is found in Orissa. What further distinguishes the eastern state is that bauxite found there has high alumina content of 44 per cent and more with low traces of silica. Physical properties of bauxite allow its digestion in refineries at low temperature and also restricted use of caustic soda for silica removal. This mineral endowment besides, Orissa for other reasons too is seen as the ideal centre to host integrated operations from mining of bauxite to its refining into alumina and finally its smelting into metal.

Smelters are ideally located at centres where energy – it could be either non-coking coal, or hydel resources – is plentifully available and at cheap rates. This is because power and fuel with a share of around 40 per cent of production cost impact smelter operations the most. No wonder then, following the footsteps of Co, the country’s other two non-ferrous leaders and rooted for Orissa to give shape to their big aluminium ambition. Hindalco is building a 1.5 million tonne, (mt) standalone refinery in an act of salvaging a virtually moribund project and also a 359,000-tonne smelter as it expands the capacity of an operating smelter to 213,000 tonnes from 155,000 tonnes. But the group that has caused commotion in the world aluminium community for its audacious alumina refinery and smelter capacity building programme in Orissa is Vedanta. The group is also building with much rapidity coal-fired power capacity of 3,600 Mw, both for captive smelter consumption and also as an independent power producer.

In fact, Vedanta’s programme for Orissa by any parameter, including investment, will find a parallel only in the announced 12 mt steel plant that South Korean is struggling to build overcoming bureaucratic hurdles and by now too common protests by locals. But unlike Vedanta, which has put on ground much of its promised investment of over Rs 50,000 crore, Posco’s $12 billion project still remains good on paper. A commitment by the state government to make available 150 mt of bauxite deposits, a portion of which is in Niyamgiri hills enthused Vedanta to make Orissa the epicentre of its work. Without going into the reasons that derailed opening of mines at Niyamjgiri, earmarked to feed the refinery at Lanjigarh, the hijacking of Dongria Kondh community welfare issue by foreign NGOs leaves a few questions unanswered. The two may be totally unconnected, but the fact is if bauxite from Orissa in particular and coal are freely available, then the Indian aluminium industry for its cost efficiency will be the last one standing in a situation of price collapse of the metal.

As aluminium prices are moving towards $1,800 a tonne, nearly 30 per cent of world capacity stands unviable. No wonder some smelters owned by industry leaders are either shut or working at stepped down capacity. You have smelters abroad where production cost could be as high as $2,700 a tonne. So even with a premium of $220-230 a tonne available in spot deals over LME quotations, whichever smelter is making aluminium at over $2,000 a tonne is consigned to red. The Indian aluminium industry, which finds itself in the lowest cost quartile globally, is finding its margins squeezed in a falling market.

“The ideal combination of high quality bauxite and plentiful availability of coal, the state having a share of 25 per cent of national coal deposits leaves most other aluminium production centres in the world well behind Orissa in terms of production costs. Alcan was here for decades before they sold Indal to Hindalco. Pechiney ahead of its merger with Alcan, which subsequently was taken over by Rio Tinto, was keen to be here. Dubai Aluminium was serious about India, perhaps still is. How sad it is that difficulties in bauxite procurement from local sources are encouraging the world’s largest producer of alumina to consider bringing some of its Australian alumina here. I shall want local NGOs to consider if by standing in the way of opening new bauxite mines, are they not to stunt the growth of domestic industry and finally create conditions for imports?,” asks a distraught Orissa government official.

The predicament of Vedanta is understandable. Its one-mt refinery at Lanjigarh and another five-mt capacity in the pipeline are geared to process Orissa grade bauxite. Denied supplies from Orissa, it is scouring around the country for bauxite. Besides logistical challenges and extra costs involved in the exercise, the Vedanta refinery, custom built to process Orissa grade mineral, is compelled to use a cocktail of bauxite procured from many centres. In any case, such supplies are also drying up. No wonder, Vedanta Aluminium Managing Director Sushil Roongta, who has to make sense of an investment of Rs 50,000 crore is sporting furrowed brows. Roongta will not disagree to the proposition that in case responsible mining, including proper rehabilitation of locals, gets repeatedly thwarted then India could face the irony of becoming an aluminium deficit country.

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