Vedanta may scale back expansion on soft aluminium prices

Earlier this month, LME aluminium prices softened to level below $1,500 a tonne on weak demand

Lukewarm aluminium prices at the London Metal Exchange (LME) has prompted diversified metals major Vedanta to hold back a plan to scale up its smelter capacity at Jharsuguda in Odisha from 0.5 million tonnes per annum to 0.8 mtpa.

Earlier this month, LME aluminium prices went below $1,500 a tonne on weak demand and excess supply from China. With no quick recovery in sight and concern on a further dip, Vedanta is being cautious.

“In the current scenario, we don't think it would be prudent and viable to ramp up smelter capacity. Aluminium prices are at multi-year lows and are expected to plunge further. Unless prices rebound to $1,600 a tonne, we might not consider expansion at the Jharsuguda smelter,” said Abhijit Pati, chief executive officer (aluminium) at Vedanta.

Vedanta erected two smelters at Jharsuguda for a combined investment of Rs 25,000 crore. One was a standalone facility with a capacity of 0.5 mtpa and the other 1.5 mtpa unit was set up as a product-specific Special Economic Zone (SEZ).

The SEZ unit is currently idle, as Vedanta is in a dispute with the state government over use of power from its 2,400 Mw coal-fired plant at Bhurkhamunda, in the vicinity. The matter is before the Odisha Electricity Regulatory Commission (OERC). In an interim relief to Vedanta, OERC recently waived the payment of cross-subsidy charges by the company.

Vedanta has already de-rated the capacity of its 1 mtpa Lanjigarh alumina refinery by 50 per cent, after struggling to run it on imported bauxite. Expanding the aluminium smelter capacity on imported alumina is not viable in the long run. This apart, the bearish outlook on aluminium prices has dampened its interest.

“Sluggish demand and heavy aluminium dumping by China has pushed prices significantly down. With no major signs of recovery, the prices are not expected to recover in the short term and might see a further downfall, as we are seeing in other commodities. Producers need to pursue systematic cost cutting strategies for long-term sustainability, including renegotiating fuel and energy contracts and supply contracts,” said Pukhraj Sethiya, associate director, energy, at PricewaterhouseCoopers.

In 2015, aluminium has been the worst performer among all base metals on the LME. It is trading at the level of 2009. Aluminium prices have fallen 19 per cent in 2015.

Fuelled by oversupply from China, where primary aluminium production rose 17 per cent in the April-September period.

SLIDING PRICES

• Vedanta has invested Rs 25,000 cr in two smelters
   
• The company to hold back expansion at Jharsuguda smelter
   
• It has already de-rated refinery capacity by 50%
   
• LME aluminium prices below $1,500 a tonne