11 Jan 2019
A consistent spike in coal costs has roiled India’s aluminium producers. If a spate of imports of fake semis and a clutch of value added products weren’t enough, smelters are unnerved by spiralling coal prices. Their worries are justified by the contribution of coal to the cost of aluminium smelting – power costs account for nearly 45 per cent of the metal production cost. As a result, aluminium production costs for all the three primary producers – Hindalco Industries, Vedanta Ltd and state run National Aluminium Company (Nalco) are hovering around $2000 a tonne. And that’s concering, especially since aluminium prices on the London Metal Exchange (LME) have dipped below $1900 per tonne- they stood at $1878.50 for the cash buyer (as on January 4, 2018). It’s no surprise that escalating coal costs and weaker LME prices have come as a double whammy for them.
India’s indigenously produced coal continues to be prioritised for power producers as the country’s electricity demand shoots up. This trend has disconcerted players in the non-regulated sectors- primarily aluminium. With coal materialisation shrinking for the aluminium players, these companies are forced to buy pricier coal sold via electronic auctions. And, the deficit in domestic coal is compensated by imports. In the April-September period of financial year (FY) 2019, thermal coal imports have widened to 84.7 million tonnes from 75.1 million tonnes last year. Imports have largely been driven by the non-regulated sector. Despite coal behemoth Coal India Ltd (CIL) ramping up production and streamlining despatches, thermal coal users in non-regulated sectors such as cement, steel, aluminium and captive power producers stay at elevated levels, keeping the average pace of imports at 10 million tonnes each month.
In the domestic market too, the landed cost of spot e-auction coal has spiked between 20 and 34 per cent during April-October this year. Led by tightness in coal availability and robust demand from the coal consuming sectors, spot e-auction premiums reached 102 per cent in September 2018, surpassing the level of 95 per cent reached during October 2017 when coal stocks at power plans had plummeted to their record lows.
Seaborne thermal coal prices have remained at elevated levels as well, adding to the woes of aluminium and other non-regulated sector entities. Spot price of 6300 gross calorific value (GCV) thermal coal from Newcastle, Australia has increased by 26 per cent between April and October of FY2019. This price hike coupled with a 13 per cent depreciation of the Indian Rupee, has led to rising coal costs for steel, aluminium, cement, and captive power plants. With imports by such players expected to remain elevated in the near term, coal cost for non-regulated players is expected to remain high for the remainder of FY2019.
How the coal conundrum is vexing aluminium producers
Aluminium producers have installed captive power plants (CPP) inside their manufacturing premises to cut down on energy sourcing costs. But the case of worsening coal shortfall has thrown their operations into disarray. The Federation of Indian Mineral Industries (FIMI) agrees that aluminium producers are facing huge coal shortage for their captive power plants, which in turn is adversely affecting their refinery and smelting operations. In addition, a shortage of railway rakes for transporting the available coal has magnified the problem. FIMI has been lobbying with the Union Government to declare aluminium smelting a core industry, which would entitle the industry to a steady supply of the scarce coal, but such requests went unheeded. Both aluminium smelters and refineries being under non-core category, the supply of coal to aluminium sector is severely affected due to priority given to core sectors by CIL.
Hindalco Industries, a key primary and downstream producer, feels the biggest impact for the company in FY2019 has stemmed from coal prices which moved north by 12 per cent between July and September 2018. Consequently, Hindalco’s aluminium smelting cost moved up 8 per cent during the period under review. As aluminium companies scurry for buying more coal at spot auctions, prices have only spiralled. Though Hindalco has tied up a major portion of its requirement through linkages with CIL, actual supplies are thinning with the coal company fulfilling 75 per cent of the promised quantity. Hindalco is worried that the cost of fuel may go up further as the company had to import this time to secure coal for the rest of FY2019. That’s also coming at a time when other input costs like furnace oil are rising in line with crude prices.
Hindalco’s bigger rival by production numbers- Vedanta Ltd, the Anil Agarwal controlled conglomerate, has seen its aluminium production cost climbing to $2018 per tonne. Despite a planned focus on structural cost reduction, Vedanta has been unsuccessful in overcoming the headwinds in the form of rising input costs and mellowing LME prices.
How the Supreme Court ruling on input imports magnifies pain
The Supreme Court of India has limited imports of green pet coke and calcined pet coke to 1.4 million tonnes and 0.5 million tonnes respectively. The top court mandated curbs are bound to have significant repercussions as the two ingredients are used in aluminium making for production of carbon anodes. The import curtailment is poised to increase pricing pressures on aluminium smelting costs for the country’s producers over the medium to long-term. A scarcity of domestically-supplied pet coke coupled with import constraints is expect to shrink margins for aluminium makers and defer future expansions. As per industry calculations, every five per cent increase in calcined pet coke (CPC) prices squeezes Ebitda (earnings before interest, taxes, depreciation and amortisation) by 0.25 per cent. The country produced 3.39 million tonnes of primary unwrought aluminium in FY 2018, utilising 85 per cent of the nameplate capacity of 4.1 million tonnes. Aluminium manufacturing consumed 1.38 million tonnes of CPC. Of this, one million tonne was supplied by domestic markets, the residual met through imports.