Vedanta to prune aluminium making cost to beat global price plunge

Aluminium CoP seen at $1,725-1,775 on par with current LME prices

At a time when around 50 per cent of the global smelters are piling lossves on subdued prices at LME (London Metal Exchange), Vedanta Ltd aims to contain its aluminium making cost in the range of $1,725-1,775 in this fiscal to beat the price blues. 

Vedanta's price projections are on par with prevailing LME prices of $1,766 per tonne (as on May 9) for the cash buyer. After ascending multi-year highs in April 2018, LME prices have been going downhill with supplies stabilising and reports of a glut in China, the world's biggest aluminium producer cum consumer. 

Sliding LME prices have unnerved the domestic producers who are struggling to contain cost of aluminium making. T K Chand, president at Aluminium Association of India (AAI) and CMD of National Aluminium Company (Nalco) feels LME at $1,800 is a pressure point. Aluminium prices falling below $1800 has magnified the woes for Indian producers. 

However, Vedanta's focus on structural cost reduction has helped check its aluminium making costs from spiraling. After two straight quarters (Q2 and Q3) where aluminium cost of production (CoP) shot up beyond $2,000, Vedanta succeeded in trimming it to $1776 per tonne in Q4 of FY19. Vedanta's enhanced sourcing of local bauxite supplied by Odisha Mining Corporation (OMC) and the ramp-up at Lanjigarh alumina refinery curtailed aluminium CoP.

As per a long-term linkage supply pact inked with Vedanta, OMC is mandated to supply 70 per cent of the bauxite mined from its Kodingamali mine. This mine has scaled a rated capacity of three million tonnes per annum (mtpa) and is expected to meet 30 per cent of Vedanta's requirement in FY2020.

To secure external bauxite supplies, Vedanta Ltd has entered into a long-term contract with Emirates Global Aluminium (EGA) for supply of up to four mtpa. Vedanta still imports nearly 50 per cent of alumina to feed its smelters. The positive trend for the company is mellowing international prices of alumina.

For 2019-20, Vedanta has pegged its alumina requirement at four mtpa. In last fiscal, the company logged record production of 1.5 million tonnes from its Lanjigarh refinery, a year-on-year (y-o-y) growth of 24 per cent. Vedanta has announced a staggered ramp-up of Lanjigarh refinery capacity, reaching a Phase-I milestone of 2.7 mtpa and ultimately expanding to six mtpa. 

In an investor presentation, Vedanta Ltd said coal sourced from its captive block and linkage coal contributed 72 per cent to its requirement in FY19. As coal production from its captive block at Chotia is set to ramp up to one mtpa and Tranche 5 linkage auction expected in this fiscal, Vedanta hopes the share to rise to 90 per cent.

Growing volumes of coal from its captive mine and those obtained via linkage are expected to contribute to the slide in Vedanta's aluminium CoP. In parallel, Vedanta is widening the value added products basket with thrust on higher domestic sales and long-term contracts with OEMs (original equipment manufacturers) to shore up margins in aluminium business.