Vedanta, Nalco look to contain costs after strong FY18 earnings

Vedanta's production cost rose 30% in FY18 due to input commodity inflation; Nalco leans heavily on Utkal-D coal block to pare output cost by 25%

Top aluminium producers like Vedanta Ltd and central public sector firm National Aluminium Company Ltd (Nalco) have set their sights on trimming costs after posting robust earnings from aluminium business in FY18.

Vedanta, in 2017-18, reported an Ebitda (earnings before interest, taxes, depreciation and amortisation) of $570 from the aluminium vertical, a three-fold surge over $188 million in 2016-17. Last fiscal, Nalco witnessed its net profit doubling to Rs 13.42 billion. While Vedanta emerged the highest aluminium producer in the country with an output of 1.7 million tonnes, Nalco achieved its normative rated capacities of bauxite and alumina and also posted its best aluminium production figures in the past five years.

However, Vedanta's cost of aluminium production in FY18, escalated to $1,887 a tonne, higher by about 30 per cent over the previous fiscal due to input commodity inflation. For the current fiscal, Vedanta has projected its aluminium making cost in the range of $1,725-1,775 per tonne, assuming that costs of imported alumina, coal e-auctions and carbon remain at their average price levels of 2017-18.

As Vedanta looks to ramp up its alumina output at the Lanjigarh refinery in Odisha to 1.6 million tonnes (mt) in this fiscal from 1.2 mt in FY18, it foresees a slide in refining cost on the back of local bauxite supplies. Odisha Mining Corporation (OMC), a state run mining entity would offer 70 per cent of the mined bauxite from its Kodingamali mines under a long-term linkage pact with Vedanta. Ever since the start of commercial operations, the Lanjigarh refnery has been sourcing bauxite from other states and also importing from New Guinea and Australia to run the plant.

Each year, Vedanta imports over one million tonnes of alumina to power its aluminiun smelters. Vedanta aims to diversify its sourcing of alumina imports to ward off sharp price fluctuations. It is also eyeing substantial savings in coal.

"We are focusing on improving linkage realisation and stepping up linkages to 63 per cent of our coal requirement in 2018-19 as opposed to 45 per cent in last fiscal. The company is expecting reduction in GCV (Gross Calorific Value) loss with Coal India's policy," said a source at Vedanta Ltd.

For Nalco, the stakes are high on captive mining from its Utkal-D coal block. Production from this coal mine, expected to commence in this fiscal, is tipped to slash the company's aluminium making cost by 25 per cent. Nalco sees substantial savings in captive coal as the cost of procuring linkage coal under FSA (Fuel Supply Agreement) stands ay Rs 1,700-1,800 per tonne. For coal sourced through e-auctions, the cost climbs to around Rs 4,000 a tonne. Nalco's chairman & managing director Tapan K Chand feels captive coal mining would be a game changer since it will prune coal sourcing cost by half compated to e-auctions. The savings on aluminium making for Nalco after captive coal mining, is pegged at $500 per tonne.

Nalco is also looking at cost cutting through upstream integration. It is proceeding with a caustic soda plant through a joint venture with Gujarat Alkalies & Chemicals Ltd at Dahej. The plant estimated to cost Rs 19.9 billion will cocoon Nalco from vacillating prices of caustic soda, a key ingredient in alumina making.