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Industry Info

Hindalco’s low-grade bauxite raises fuel cost

Low quality partly on account of mines being old, partly because they weren’t of good quality in first place, say analysts

Hindalco Industries Ltd is extracting inferior quality of bauxite from some of its mines that is raising costs, a concern for the Aditya Birla Group’s flagship firm as it rolls out an ambitious programme to boost aluminium production.

The company is in the midst of more than doubling its aluminium-producing capacity to 1.22 million tonnes (mt) by March 2017 with two new smelters Mahan and Aditya, from the existing 506,400 tonnes capacity now. This will push its bauxite requirement up to about 7 mt per year from about 3-3.5 mt, analysts said.

Hindalco has total bauxite reserves of about 440 mt in Chhattisgarh, Maharashtra, Jharkhand and Odisha, but other than that from Odisha, the bauxite from other locations is of low quality, partly because the mines are old and partly because they were not of good quality in the first place, according to analysts.

Low-grade bauxite needs more fuel to be converted to metal.

“Hindalco’s aluminium segment has weakened materially over the last few years as bauxite grades have deteriorated and coal costs have increased,” a 12 November JPMorgan report said. “Aluminium remains challenging, with Ebit (earnings before interest and tax) missing estimates and Ebit margins at 7.1% among the lowest ever reported by the company.”

Questions emailed to Debu Bhattacharya, Hindalco’s managing director, on Wednesday, remained unanswered. An Aditya Birla Group spokesperson also did not reply to the same questionnaire.
Hindalco’s bauxite mines are located in Lohardaga in Jharkhand, Baphlimali and Kodinga Mali in Odisha, Surguja in Chhattisgarh, and also in Maharashtra, according to analysts.

The company sources about half of its bauxite from captive mines and the rest comes from high-grade ores procured from the open market so it can blend the high and low grades to create a suitable mix, analysts say.

India is one of the lowest-cost producers of aluminium in the world at $1,750-1,850 a tonne, according to data from CARE Research. In China, it stands at about $2,000 a tonne.

Odisha mine key

Analysts said Hindalco’s Baphlimali Hills mines in Odisha, a new project where bauxite reserves are rich and plentiful at 200 mt, can raise the bauxite supply to Hindalco, but local protests there have raised some concerns over how much can be extracted.

“If they can’t ramp up this mine fully, then smooth availability of bauxite to its refineries will be in doubt,” said an analyst, who did not want to be named. “It may be solved in the longer term, but in the near term, it is a problem.”

So far, 590,000 tonnes of bauxite has been mined at Baphlimali Hills, Bhattacharya said in an investors’ presentation on 12 November.

To be sure, protests surrounding the Baphlimali mine may dissipate, and once on stream, it could lower the amount of bauxite Hindalco buys from the market to 45% from 50% now, said Rakesh Arora, managing director and head of research at Macquarie Capital Securities (India) Pvt. Ltd, a brokerage firm.

“They need to put a conveyor belt connecting the mine to the refinery, and that is one year late,” Arora said.

JPMorgan is still overweight on Hindalco as it sees the benefits of its flat-rolled products plant at Hirakud in Odisha and the weak rupee offset some of the dollar-denominated price falls of aluminium on the London Metal Exchange, which serves as a benchmark for pricing, its report said.

The newly commissioned Hirakud project involves relocated equipment from a closed facility of the company’s overseas unit Novelis Inc.

JPMorgan said it expected Hindalco’s copper segment to support earnings with the help of good treatment and current refining charges currently.

The larger concern for Hindalco is the availability of coal, with electricity accounting for 41% of the costs, higher than 14% of bauxite, said the analyst cited earlier.

Adequate coal supply is threatened owing to the government’s investigations into coalfield allocations and the Aditya Birla Group is among those being probed.

In the larger context, raw material availability has a chance to damp the export plans of all aluminium producers, including Hindalco, that invested heavily in capacity expansions.

“India has a surplus aluminium capacity and we were thinking India will be an exporter,” Revati Kasture, chief general manager and head of research and grading services at CARE Research, said in an email. “But after the coal allocation controversy, every mine allocation is being seen in an unfavourable light.”

Source: Live Mint