Vedanta, Nalco look to contain costs after buoyant earnings

The Indian arm of leading aluminium producers Vedanta and public sector National Aluminium Company (Nalco) have set sights on trimming costs after posting robust earnings from the aluminium business in FY18.

Vedanta, in 2017-18, reported earnings before interest, taxes, depreciation and amortisation of ~38,413.5 million from the aluminium division, a threefold surge over ~12,669.7 million in 2016-17. In FY18, Nalco’s net profit doubled to ~13.42 billion. While Vedanta emerged the highest aluminium producer in the country with 1.7 million tonnes (mt), Nalco achieved its normative rated capacities of bauxite and alumina, and its best production figures in five years.

However, Vedanta's cost of aluminium production in FY18 escalated to ~127,194 per tonne, higher by about 30 per cent over the previous year due to commodity inflation. For the current financial year, Vedanta has projected its aluminium-making cost in ~116,268119,638 per tonne, assuming prices of imported alumina, coal e-auctions and carbon remain at their average price levels of 2017-18.

Vedanta looks to ramp up alumina output at Lanjigarh refinery in Odisha to 1.6 mt in this financial year, from 1.2 mt in FY18. It foresees a slide in refining cost on the back of local bauxite supplies. Odisha Mining Corporation (OMC), a state-run entity, would offer 70 per cent of the mined bauxite from its Kodingamali mines under a long-term linkage pact with Vedanta. Since the start of commercial operations, the Lanjigarh refinery has been sourcing bauxite from other states and also importing from New Guinea and Australia to run the unit.

Each year, Vedanta imports over one mt of alumina to power its smelters. It aims to diversify the sourcing of alumina imports to ward off sharp price fluctuations. It is also eyeing substantial savings in coal.

“We are focusing on stepping up linkages to 63 per cent of our coal requirement in 2018-19, as opposed to 45 per cent in last financial year. The company is expecting reduction in GCV (gross calorific value) loss with Coal India’s policy,” said a source at Vedanta.

For Nalco, the stakes are high on captive mining from its Utkal-D coal block. Production from this mine, which is expected to commence in this financial year, is tipped to slash the company's aluminium-making cost by 25 per cent. Nalco sees substantial savings in captive coal as the cost of procuring linkage coal under its Fuel Supply Agreement stands at ~1,700-1,800 per tonne. For coal sourced through e-auctions, the cost climbs to around ~4,000 a tonne. Nalco’s chairman Tapan K Chand feels captive coal mining would be a game changer, since it will prune sourcing cost by half compared to e-auctions. Nalco’s savings on aluminium-making after captive coal mining is at $500 per tonne.

Nalco is also looking at cost-cutting through upstream integration. It is proceeding with a caustic soda plant through a joint venture with Gujarat Alkalies & Chemicals at Dahej. The plant, estimated to cost ~19.9 billion, will cocoon Nalco from vacillating prices of caustic soda, a key ingredient in alumina-making.