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Coal shortage to hit Hindalco hard

Lack of adequate coal supply may hit Hindalco Industries’ expansion plans. In some locations, the company may have to pay $300 per tonne extra for acquiring coal from the open market resulting in erosion of its profits significantly. In some others, the company may have to re-evaluate its investment strategies.

 The company in August said that it plans to produce around three million tonnes of alumina and one million tonne of aluminium from 2014, as production from the company’s Mahan and Utkal Alumina will come on-stream.

 Analysts said the company’s production cost would escalate significantly to execute the expansion plans, as it has not yet secured captive coal. The stage II clearance of Mahan coal block is yet to come while the coal blocks in Odhisa have come under the scanner of CBI on alleged irregularities in allocation of the mines to Hindalco. At present, the company has only one captive coal mine — Talabira I coal mine in Odhisa, which is going to exhaust in next three to four years, analysts said.

 “The company must have been buying coal at the market price which is around $1,800-$1,900 per tonne. This would result in the company paying around $300 per tonne extra for coal,” said an analyst from Prabhudas Lilladher declining to be identified. He said that things would be clear after the company announces their earnings for July-September, quarter.

 Coal India does not have enough coal to provide linkages for all the projects of Hindalco while the permission for captive coal mine for the company is on hold. As a result, Hindalco has no option, but to purchase coal from the open market. Since the company’s smelter is not located near the port the logistics costs will be higher for the company, said the analyst.

 Sanjay Jain, an analyst at Motilal Oswal, also said the cost of production for the company will escalate as they have failed to secure captive coal. Around 6-7 tonnes of coal are needed to fuel power plants of one million tonnes of aluminium.

 A senior official from Hindalco confirmed to Financial Chronicle that the trial run of the Mahan smelter has started, but he declined to comment on the coal-linkages citing that the company is in a silent period, as its financial results are slated for November 12.

 Mahan aluminium smelter, in Madhya Pradesh, is under commissioning and trial production has started. This project includes a smelter power plant complex, comprising of 359 kilo tonnes per annum aluminium smelter and a 900 mega watt captive thermal power plant. The project has access to the Mahan coal block through a joint venture with Essar Power. Hindalco holds a share of about 3.6 million tonnes per annum in the coal block. Mahan coal block has received stage I clearance from ministry of environment and forests (MoEF) and is awaiting stage two clearances.

 The Mahan coal mine in Madhya Pradesh, is most crucial for Hindalco and is awaiting a much-delayed stage-two clearance, and in August, Hindalco’s management said a clearance is likely to come by December.

 “The company has started trial production at its Mahan aluminium smelter, but if the clearance for the mine does not come by December, full-scale commercial production will be in doubt,” said Bhavesh Chauhan, an analyst at Angel Broking.

 At present, the company produces around 1.5 million tonnes of alumina and around 0.6 million tonnes of aluminium. Further, the company is also ramping up production of Utkal Alumina project that would produce 1.5 million tonnes of alumina per annum.

 The Utkal Alumina project, in Odhisa, is a 1.5 million tonnes refinery with captive bauxite resources of 200 million tonnes. However, with the CBI inquiry the company is unlikely to get any clearance on the coal blocks in the next two to three years, said Chauhan.

 Hindalco’s existing smelters in Hirakud in Odisha and Renukoot in UP produce 542,000 tonnes of aluminium, the second highest in India.

Source: mydigitalfc