Coal news and updates

Clearances stuck, Hindalco may be staring at coal shortages

Profitability to be hit as sole captive mine may run out of supply in 3-4 years, firm may have to buy coal at higher price...

Hindalco Industries Ltd, Aditya Birla Group’s flagship firm, may soon face a severe coal shortage that is likely to hurt profitability and increase debt.
The firm’s sole captive mine will run out of supply in the next 3-4 years, and prospects of getting fast clearances for the four new coalfields allocated to Hindalco after 2005, too, have dimmed with the Central Bureau of Investigation’s (CBI) probe on allocations, analysts said.
“In a way, all the coal blocks are under scrutiny. In such a situation, I don’t see any government official wishing to take the risk of giving clearances,” said one metal analyst, not wanting to be named. “There is other opposition such as that from the tribal affairs ministry for Hindalco’s Mahan coal block; this could get stronger.”
Coal is crucial for Hindalco as it is on the course of an ambitious expansion for aluminium in India. Production of this white alloy is energy intensive, roughly 6-7 tonnes of coal are needed to fuel power plants to produce 1 tonne of aluminium.
If the new coalfields are not approved, it would mean Hindalco will have to buy more coal at market-determined prices and also import it, which will prove expensive as its plants are not near the coast, making logistics a costly affair.
Hindalco’s existing smelters in Hirakud in Odisha and Renukoot in Uttar Pradesh produce 542,000 tonnes of aluminium, the second highest in India. The company also produces copper at other locations.
The company can’t comment on how it is handling its problem of fuel security and the status of the CBI probe due to its upcoming board meeting for the July-September results on 12 November, a Hindalco spokesperson said.
Hindalco gets about 3 million tonnes (mt) of coal from Talabira I coal mine in Odisha that was allocated to it in 1994. This mine, which fuels the power plant on which its existing aluminium smelters runs, has coal supplies that will last only for 3-4 years, analysts said. Talabira II and Talabira III coalfields, also in Odisha, are facing CBI’s first information report (FIR) that was filed on October 15 questioning the manner in which they were allocated. CBI has also filed an FIR naming Aditya Birla Group chairman Kumar Mangalam Birla.
Birla and Hindalco have been booked for criminal conspiracy and that in 2005 they colluded with public servants to get a share of the Talabira II coalfield that was earmarked only for government-owned companies, a CBI official said, requesting anonymity.
The federal agency also filed an FIR against the former coal secretary P.C. Parakh on 15 October.
Hindalco’s other coalfield, Tubed in Jharkhand, which is awaiting forest and environment clearances, was issued a show-cause notice by the CBI last year as part of the same investigation. Hindalco, on its part, has denied any wrongdoing.
The Mahan coal mine in Madhya Pradesh, most crucial for Hindalco, 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, analysts said.
“Hindalco has a shortage of coal and coal is a big input for its profitability,” said Rakesh Arora, managing director and head of research at Macquarie Capital Securities (India) Pvt. Ltd, a brokerage. “For the long term, this is a serious problem.”
Arora said Hindalco’s units and are expected to “keep trudging along with less profitability” if captive coal supply doesn’t improve.
“Owing to slow progress and inadequate availability of captive coal at the Mahan and Aditya smelters, we expect both these smelters to operate at subdued return ratios,” a 11 October report from brokerage Espirito Santo Securities India Pvt. Ltd said.
“We think Hindalco’s cost of production will remain high in the range of $1,950-$2,100 a tonne until their associated coal blocks become operational,” said the report written by Ritesh Shah and Anshuman Atri.
To compound the problem, metal premiums are seen falling due to excess aluminium capacities coming up in India (359,000 tonnes each of Mahan and Aditya smelters and 325,000 tonnes of Balco) and a likely warehouseing norm tweak at the London Metal Exchange (LME) that could boost world-wide supply of the metal, the analysts added.
LME, which sets a global benchmark for metal traders, has proposed easing of its warehousing norms so that more aluminium is freely available and the long queues to take physical deliveries of the metal are shortened, according to a report by the Financial Times.
Aluminium producers fear this move will increase supply of the metal, pushing down prices.
Hindalco’s consolidated debt is set to increase over Rs.75 billion (Rs.7,500 crore) by the end of the fiscal year to March as Hindalco is still in the midst of expansion and expected to incur a further Rs.90 billion (Rs.9,000 crore) in capex in 2013-14, Espirito Santo’sreport added.
Hindalco has already scaled down its expansion plans.
In August, after the declaration of its June-quarter results, the company announced it is re-evaluating its investment strategy with respect to the Aditya refinery and Jharkhand aluminium projects, “in view of the delays in getting various regulatory approvals and the current uncertain economic development”.

Source: www.livemint.com