India’s plans to be ‘big in aluminium’ 

Vedanta Resources plc chairman Anil Agarwal caused a stir in the global aluminium industry when some time ago he made the bold announcement that India had everything going in its favour to raise the silvery white metal smelting capacity to 20mt (million tonnes) from the current 4.129mt in a reasonable number of years, writes Kunal Bose. Many may think that at least for once, Agarwal, who controls global mining and metals assets of over $37bn and turnover of $13bn, was shooting from the hip. Not really. Everything will fall in place when India’s bauxite resources of 3.48bn tonnes and coal resources of over 300bn tonnes — the two ingredients required for making aluminium — are considered. The figures denote that India holds the world’s fifth-largest coal resources and eighth-largest bauxite resources.

The fact that the per capita consumption of aluminium in India is only 2.2kg against the global average of 8kg and China’s over 20kg could too have provoked Agarwal in making the statement. His 20mt aluminium smelting capacity vision is to be seen as Agarwal’s declaration of faith in India, which grew its gross domestic product (GDP) by 7.6% in 2015–16 (April to March) and is now looking at 8% sustainable growth in coming years. But for this kind of growth to continue to happen, prime minister Narendra Modi will have to accelerate the reforms process with greater purpose than was seen in the past two and a half years.

“India will need more and more aluminium in the transport, construction and house building, aviation, power and electrical and packaging sectors as the economy continues to grow and gain in sophistication. Much aluminium will be needed as the prime minister’s ‘Make in India’ programme rolls on. Creation of 100 smart cities across the country will be yet another area which is to call for big use of the white metal,” says Agarwal. He gives the impression that aluminium demand growth to take care of the kind of capacity he has in view for India will not be a hindrance. Last year, aluminium demand in India was up 10.4% and this should remain the growth pattern in coming years too. Seems Agarwal believes if China’s per capita aluminium consumption could double in five to six years from 2009, why could not that happen in India? “I want India to emerge from here really big, very big in aluminium. Are you aware that about 10% of the Chinese working population is involved in one way or the other with the aluminium industry — from bauxite mining to alumina refining to metal smelting and then further down to value addition to trading and distribution. Jobs what India needs for its growing ranks of young population. Hundreds of small and medium enterprises in aluminium parks adjacent to smelters and elsewhere like close to automobile manufacturing plants will come up with the country making growing volumes of primary metal,” says Agarwal.

Of course, the best place to build smelters in India is Orissa where 1.8bn tonnes of high quality bauxite amounting to 60% of the country’s total are found. Similarly, the coastal state in the country’s east with three all season ports is sitting on coal reserves of 75.07bn tonnes, that is, 24.89% of India’s total. No wonder then,Vedanta Aluminium owns smelting capacity of 1.75m tonnes in Orissa, National Aluminium Company 460,000 tonnes and now Hindalco 360,000 tonnes of its total around 1.3mt. All the three aluminium producers in India have the capacity to build new smelting capacity but for imports meeting 

nearly half the local metal demand. Aluminium imports into India originate mostly in the Middle East and China. While smelters in the Middle East have the benefit of cheap gas-based electricity and excellent logistics back-up, in the case of aluminium producers of China a subsidy of $200 a tonne, including almost half of that on electricity account is available. “You have, therefore, smelters in the Middle East which make aluminium at about $1,150 a tonne against the average cost in India of $1,500 a tonne. Mind you this is in spite of Indian efficiency levels both at alumina refining and metal smelting match the best in the world,” says Vedanta Aluminium CEO Abhijit Pati. No wonder, the Indian import duty raised to 7.5% effective April 2016 from 5% is proving no deterrent for either the Middle Eastern or Chinese smelters to export growing quantities of primary aluminium and aluminium products to India. In the meantime, if anything, the Indian competitiveness in aluminium is compromised to some extent by the government doubling the coal cess in the current year’s budget to Rs400 ($5.97) a tonne. Hindalco vice chairman Debnarayan Bhattacharya says the revised coal cess “has more than offset the benefit of increase in import duty.” In production cost of aluminium in India, the share of electricity alone is 40%.

India’s aluminium imports registered a compound annual growth of 13% from 881,000 tonnes in 2010/11 to 1.608mt in 2015/16. Imports meeting nearly half the Indian domestic demand, the local industry could produce only 2.372mt in 2015/16 against its capacity of 4.129mt. Pati says:“The combination of large idle capacity, debts overhang of Rs700bn ($10.37bn) on aluminium makers and 16% year-on-year fall in metal prices along with collapse in premiums left the Indian industry with losses of over Rs40bn in the last financial year.” India imported 491,283 tonnes of aluminium from the Middle East in 2015/16 when metal arrivals from China were 220,431 tonnes. Between the Middle East and China, they accounted for 44% of Indian aluminium imports. “We have told New Delhi since the demand for aluminium in India will continue to grow at a minimum annual rate of 10%, we will be targeted for unloading of surplus metal by smelters in the Middle East and China,” says Pati.

Last year China’s share in the global aluminium production of 57.51mt was 31.188mt. Aluminium groups in the Middle East such as EMAL (UAE), Ma’aden (Saudi Arabia), Dubal (UAE) and Alba (Bahrain) have grown smelting capacity rapidly in the past one decade now figuring among dominant world producers. But as the local demand for the metal is limited, the Middle Eastern smelters will always remain under pressure to export. “In the circumstances of excess capacity and production in two centres close to us leading to their becoming aggressive exporters, what we in India are asking from the government is a level playing field. Let there be a provisional 20% safeguard duty on primary aluminium and aluminium products. You have this duty for steel for close to six months. Why so much of our smelting capacity should be lying idle when the demand is there?” asks Agarwal.

CHINA DATA OBFUSCATION

The recent set of aluminium production figures submitted by China Nonferrous Metals Industry Association (CNMIA) to the International Aluminium Institute (IAI) has led industry constituents in the rest of the world to believe the country, which alone accounted for over 31mt of the 2015 world output of close to 58mt is once again at the game of data obfuscation. But, then, much of the Chinese economic data remains suspect. Assuming that the Chinese submission to IAI that its aluminium production between December and February was down by an annualized 6.6 mt was correct, it would then be inconceivable that production could pick up by 5.2 mt in March and April, on a yearly basis. A recent Reuters report quoting an analyst with consultancy firm AZ China said the month-on-month jump in production underlining CNMIA submission to IAI amounted to “10 smelters running at full speed on 1 March after being idle on February 29”.

Whether it is aluminium or steel, the first quarter of a year has traditionally seen significant changes in Chinese production and prices that factor in inventories and local and global demand. But this year’s aluminium output variance is just wildly unreasonable. Like any other Chinese riddle, this one about aluminium production figures is difficult to unravel. More so because CNMIA made pledges, more than once, of taking 4.6 mt tonne of smelting capacity offline in the face of a fall in aluminium rates on the Shanghai Futures Exchange (SHFE) over the past six years but ahead of prices perking up earlier this year. China could not avoid making such a commitment when industry leaders such as Rusal of Russia,Alcoa of the US and Hydro of Norway have all shaved good volumes of smelting capacity in attempts to bring supply in line with demand.

The industry in the US has been found most aggressive in dismantling smelting capacity. The number of smelters there in operation will be down from 23 in 2000 when production was 3.7mt to 4mt by this year end when output expected is 565,000 tonnes. Rapid shrinking of the US industry was caused by low aluminium prices, steady rise in dollar value and growing competition from China. The industry in the West, including Russia, is exercising strict production discipline. But for this to bear fruit by way of prices leaving good margins for producers on a sustainable basis, the country that accounted for nearly 55% of world output last year must do its bit. The complaints against China is that no sooner did SHFE aluminium prices started improving earlier this year, than it started doubling down on efforts to bring idled smelting capacity back on production. Government subsidies, including low tariff electricity, which is the biggest cost component in aluminium making and cash support, are the enablers in capacity revival.

But as Pati says:“Chinese officials are prone to dismissing all such complaints relating to fair trade distorting subsidies as a potpourri of untruths and wild assertions.” Pati’s concern is that China will remain prone to pushing its surplus metal in the world market, including India, to the detriment of smelters of importing countries. As floods of cheap imports from China have led to smelting capacity withering in many parts of the world, the truncated industry in the US is aggressively lobbying the Obama Administration to take steps that will force Beijing to rein in production and subsidised export of aluminium products. To add substance to the campaign against unfair trade practices, US aluminium makers funded the visit of a research team to China to establish the veracity of complaints that Beijing and provincial authorities are providing subsidies running into billions of dollars to the industry.

In the meantime, the US International Trade Commission (ITC) has begun the process of reviewing “foreign government policies” that result in global overproduction of aluminium and undesirable exports. Although ITC has not named China, its trade practices will be the subject of scrutiny. The Aluminium Association of the US has put the Chinese industry in the dock for its ‘overcapacity’ and ‘questionable trade practices’. Chinese aluminium exports rose to $23.8 billion in 2015 from $6.2 billion a decade ago. 

Norsk Hydro now top dog in Brazilian aluminium complex

The Norwegian owned Norsk Hydro company is now the dominant force in the aluminium complex in Brazil, following the decision of the Vale
mining company to sell its share in the MRN bauxite project, writes Patrick Knight. Both Alcoa and Novalis have ceased making primary aluminium, and Brazil’s giant Votorantim company has cut output at its Brazilian Aluminium Company, CBA subsidiary.

Until a few years ago, two Brazilian companies, Vale and Votorantim, owner of the Brazilian Aluminium Company, CBA, dominated the aluminium industry in Brazil, although American giants Alcoa and Alcan, now Novalis, had an important presence.

Vale had a stake in the huge Alunorte alumina plant, in Para state, and near the mouth of the Amazon river, in which it had a 50% share, as well as being a leading shareholder in the Albras smelter. This is located near Brazil’s second-largest hydroelectric power station,Tucurui, and is close to where Brazil’s main reserves of bauxite are found.

Vale also owned the relatively small Valesul smelter close to Rio de Janeiro, and was a founder member of the consortium which 40 years ago, developed Brazil’s largest bauxite complex, MRN, the Trombetas plant, on the river of that name, along with CBA and American companies. Over the years,Vale has gradually sold all its assets in the aluminium sector to Norsk Hydro. Brazil now houses the largest of Norsk’s operations. Norsk employs more than 5,000 staff, and owns six plants in Brazil. These include a share in the Alunorte alumina mill, and 500,000 tonnes capacity, a 50% share, of the aluminium produced at the Albras smelting plant. Norsk is now negotiating to buy the 40% share in the MRN bauxite mine that Vale still controls, although the approval of all the other shareholders in the project are needed for this sale to be completed.

CBA’s smelters are all close to the city of Sao Paulo. During the past 20 years, CBA it had steadily increased smelting capacity to 475.000 tonnes, making it the country’s leading single producer of primary aluminium. CBA made a point of being as close to self- sufficiency in electricity as possible, and also had as a policy exporting at least a third of its output. The company has now closed several lines, and will make only 325,000 tonnes of primary aluminium this year. CBA made almost as much money from the sale of surplus electricity as from primary aluminium last year. Until now, CBA has obtained the bauxite it needs from its mines in Minas Gerais state. But the rising cost of mining there, and the difficulty of transporting the bauxite to its processing plants — which involve a devious railway journey, made by a train each day — means the CBA plans to increase bauxite production at the ‘Rondon’ project it owns in Amazonia. The reserves are close to Paragominas, where Norsk Hydro also has mines. CBA is considering building a large alumina plant at Paragominas, but is concerned that demand for alumina is stagnant worldwide at the moment.

Virtually all of the manufacturing industry in Brazil has been badly affected by the fall in demand caused by recession. The worst hit, the motor industry, the most important single market for primary aluminium, is selling a third fewer vehicles this year than in 2015 and the smallest number since 2008. Numerous car plants are in danger of having to close down. Companies from all parts of the world were attracted to Brazil by the fact that per capita ownership of cars there is relatively low, but many are now losing money. Things are little better in the white goods sector, as with unemployment rising, wages falling, and with many Brazilians having difficulty in paying their debts, the situation is unlikely to improve in the near future. Following plant closures by Alcoa and cuts in output by other companies, the total amount of primary aluminium produced in Brazil totalled only 770,000 tonnes last year, compared with the 1.3mt (million tonnes) of 2013.

CBA has ceased making cables for the electricity industry, as demand for new long distance tranmission systems has slowed. Along with all others in the industry, CBA has cut back production of the manufactured products used in the construction industry. Construction experienced a very buoyant decade, but there has now been a sharp downturn in the start on new house building projects. A large backlog of unsold property has built up. The aluminium industry, for which electricity forms a large share of total production costs, has been badly affected by the very dry weather which Brazil has experienced during the past couple of years. This has resulted in the water level of the lakes feeding hydroelectric power stations falling to record lows. The electricity generating companies have been obliged to use high cost gas, or diesel fired power stations, and distribution companies have increased their rates. The PT government which has ruled Brazil for the past 14 years, gave priority to aiding the less well off proportion of the population. Although pressed hard by the aluminium and other large scale users of electricity to give them special rates, the government was not prepared to renew the privileged rates which encouraged the aluminium industry to establish in Brazil in the 1970s. No new primary plant has been built in Brazil for 25 years.

Following a series of corruption scandals, the Brazilian president, Dilma Roussef, was forced from power in April. Although it is not certain that the process of impeachment approved by both houses of congress will be ratified by the appeal courts, it seems unlikely that the PT will return to power soon. The likelihood of a return to more orthodox economic policies, has already resulted in the Brazilian currency, whose value fell by 50% during 2015, recovering some ground. This is encouraging foreign investors to consider returning to Brazil after a long absence. Brazil is still one of the world’s leading producers and exporters of bauxite and alumina, and making greater use of these products to make more primary aluminium in Brazil seems entirely logical. Some 35mt of bauxite are now mined each year in Brazil. At the Trombetas mine, 17–18mt is produced each year, 9mt by Norsk at its Paragominas mine, and about 4.5mt at the Juruti mine, opened upstream from Santarem on the main Amazon river by Alcoa a few years ago. Slightly more than 10mt of bauxite is exported each year from Brazil as is about 8mt of the 10.5mt of alumina now produced.

One of the leading uses of aluminium in Brazil has long been for making cans for beverages of all types. Some 540,000 tonnes of all the aluminium used in Brazil is recovered by an army of collectors, and re-processed each year. But the economic downturn has brought two decades during which the sales of drinks in aluminium cans grew each year to an end and sales of both beer, and soft drinks fell sharply in 2015.  

 Interview with Vedanta Resources’ CEO Tom Albanese 

Should India build smelters in West Asia?

In some countries, you get the right combination of low-cost power and access to capital. But, the first thing you miss there is bauxite. You also don’t have any significant local market for aluminium. So, if you are a producer there, you have to bring bauxite from West Africa or somewhere else and find major export outlets. West Asia is now facing a net heavy oversupply of aluminium. Ideally, a smelter should be next to bauxite and coal mines and the market. India fits that bill.

Your chairman, Anil Agarwal, says India has abundant natural resources and demand potential to lift annual aluminium smelting capacity to 20mt from 4.1mt. Is he not too optimistic, since a lot of local capacity now remains idle? The question is, will Indian demand be there in future to support that kind of capacity build-up? For local demand of 20mt, we have to have a very long-term perspective, pitched on multiple decades of 8% annual gross domestic product growth. Now, the issue is: From where will India get that big a volume of aluminium? Will it buy the white metal from China, which has around 50% share of world production and the Middle East, which in the absence of any major domestic demand must always remain a big exporter or will there be big enough indigenous capacity to take care of growing demand? I will say local aluminium demand growth stands to get a major boost from the Make in India programme of prime minister Narendra Modi and the renewed emphasis on infrastructure development.

What gives you confidence that India could build that big a capacity?
You require bauxite, cheap energy and capital to build smelters — all in large volumes. India is rich in geological endowments of coal, which, if properly harnessed, becomes a cheap source of electricity and bauxite that is refined into alumina for smelter use. What you don’t have often here is social sanction to open mines and build alumina refineries and smelters. So, the challenge is to break that logjam by upholding the best practices from social and environment perspectives.

India has bauxite resources of 3.5 billion tonnes (bt). But, as Vedanta itself has experienced, a reserve is identified for you by the state and then when you go to open the mine, you meet with resistance from indigenous people and non-government organizations, resulting in project abandonment. Will you agree a precondition to bringing natural resources into the production stream requires a time-consuming exercise to bring all stakeholders on the same platform?

Most bauxite reserves are near the local areas and not on the local areas. So, that’s no different from iron ore or copper ore reserves. The point is, you have to find social solutions to open new mines. Unfortunately, bauxite mining in the country has been politicized. What I would like to do is to break that jinx. NGOs want social and economic development of communities living around mine sites. So, you judge the miners by social programmes embracing health care and education and local infrastructure development that we fund and support.

Aluminium smelters in India are all run on coal-fired electricity. Environmentalists find burning of coal to produce the metal nature-degrading. Can you prove them wrong?

India is very strong on coal with resources of over 300bt. I would not rule out coal in any way from the country’s energy space. At the same time, mining has got to be of world-class and thermal power plants will have to go on reducing their carbon footprints. Transformation has to come by way of technology induction on a continuous basis and use of best practices. A lot of power is needed to make aluminium, often described as ‘frozen electricity’. We need low-cost power to be a competitive aluminium producer. For the sake of the environment, power and its use have got to be clean.

How can aluminium in its present depressed state attract new capital?
Let me give an example.Vedanta now has 1.3m tonnes of unused smelting capacity in India. To attract further new capital, we have to first start using that capacity and also make money on the investment. To give a shot to white metal demand and make fabrication cost-effective, I want to build aluminium parks around our smelters in Odisha’s Jharsuguda and Chhattisgarh’s Korba. My experience is that the most efficient fabricators are located next to smelters. Since the molten metal from smelters is transported to the next-door aluminium parks, fabricators are spared the big reheating cost.

Should India build smelters in West Asia?

In some countries, you get the right combination of low-cost power and access to capital. But, the first thing you miss there is bauxite. You also don’t have any significant local market for aluminium. So, if you are a producer there, you have to bring bauxite from West Africa or somewhere else and find major export outlets. West Asia is now facing a net heavy oversupply of aluminium. Ideally, a smelter should be next to bauxite and coal mines and the market. India fits that bill.