WITH a major crisis brewing in the aluminium sector in India, the government is under pressure by primary aluminium producers to raise tariffs on imports of both the primary metal and scrap. The Aluminium Association of India (AAI), the industry lobby, has been demanding curbs on rampant imports of the metal, especially from China and the Gulf.

The government, however, is wary of raising tariffs and alienating small smelters who import scrap and aluminium in large quantities. And in a battle between a powerful industry lobby representing four large producers versus several small firms, politicians inevitably hesitate to back the big boys.

The four primary aluminium producers include the National Aluminium Co Ltd, a public sector undertaking, and three large private players — Hindalco Industries, which is part of the Aditya Birla group, and Vedanta and Balco, both controlled by UK-based Indian billionaire entrepreneur Anil Agarwal. Balco (formerly Bharat Aluminium Co Ltd) was also a government-owned unit, but was sold to Vedanta about 15 years ago.

According to the AAI, the domestic aluminium industry is bleeding, with all the players suffering hefty losses. Companies such as Vedanta and Hindalco have invested billions of dollars in recent years in expanding capacities and promoting greenfield projects.

But the global commodity crisis has resulted in a sharp decline in international aluminium prices. Worse, this has coincided with the sharp slowdown in the Chinese economy, resulting in decline in off-take in the world’s largest consumer of the metal. Consequently, Chinese companies are dumping aluminium in India, compounding the crisis.

The AAI points out that aluminium prices have tumbled from a peak of $2,555 a tonne in June 2011 at the London Metal Exchange (LME) to $1,550 a tonne at present. Over the last six months, aluminium prices have fallen by a sharp 20pc.

Abhijit Pati, CEO, aluminium, Vedanta Ltd, who is also a key member of the AAI, says that even the premium on aluminium has fallen significantly. The premium for the Indian metal has dipped from $500 a tonne to a mere $70. Consequently, a company like Vedanta is making a loss of $100 to $250 on sale of every tonne of aluminium, as the cost of production is about $1,800 a tonne, he says.

Of course, Indian producers could still have made profits, but they have borrowed heavily in recent years to invest in greenfield projects. All these plans are now unraveling and the major players are planning to shut down their operations.

Vedanta, for instance, plans to shut down its Lanjigarh operations in the eastern state of Odisha. “We are severely constrained by this excessive cost burden on our Lanjigarh operations,” says the company. “Our cost of production is significantly higher and is impacting the viability of the plant.”

Vedanta has been operating the 1m tonne plant for about 10 years, despite facing enormous problems. The company claims it is losing Rs30m every day because of the high costs incurred by the plant in obtaining bauxite from other parts of India and even from around the globe.

When the company selected Odisha for the greenfield project, the state government had assured that it would supply 150m tonnes of bauxite every year from deposits in nearby districts. But mining atop the Niyamgiri hills had to be stopped following protests from local tribals — which had the backing of top leaders of the United Progressive Alliance (UPA), including Rahul Gandhi, the Congress vice-president — about five years ago.

Last month, the Odisha government informed Vedanta that it would not be able to provide bauxite to the Lanjigarh plant. The result: the company has decided to shut down the refinery, in which it had invested about Rs45bn. About 10,000 people directly dependent on the plant for their livelihood will become jobless in this impoverished state.

Balco is also shutting down a unit later this year because of the decline in aluminium prices and the high cost of production in India.

THE installed capacity of the domestic aluminium industry is about 4.5m tonnes per annum, though demand is about 2.5m tonnes. However, capacity utilisation has also dipped to just 50pc following slackening demand.

Growing imports from China and the Gulf have virtually destroyed the domestic industry. In 2008, imports accounted for less than 35pc, but today they add up to more than 55pc of domestic demand.

The domestic industry claims that imports have grown at a CAGR (compound annual growth rate) of 16pc over the past five years, but the domestic sector has been reporting negative growth of 1pc CAGR. Imported aluminium is cheaper by about $200 to $250 a tonne.

Aluminium producers here claim that China — which accounts for more than half the world’s aluminium production — offers indirect subsidies including discounts on power, adding up to about $200 a tonne. Similarly, the cost of energy in the Gulf countries is low compared to India, making aluminium from that region cheaper.

The recent devaluation of the yuan against the dollar has made imports from China even more attractive to smaller smelters in India. The AAI is seeking a doubling of basic customs duty from 5pc on aluminium and quadrupling of duty on scrap and waste from 2.5pc. Last year, India imported more than 1.5m tonnes of aluminium and about 860,000 tonnes of scrap.

Aluminium producers cite the examples of Russia and Brazil, which impose import duties of 10pc and 20pc respectively to protect their domestic players.

India’s per capita consumption of aluminium is around 2 kg, compared to 6.8 kg for Brazil, 16.7 kg for China and 38.2 kg for Germany. Demand, however, is growing at almost double the international rate of 6pc per annum. Worryingly, imports from China have been growing at a CAGR of over 30pc over the past five years.

Published in Dawn, Economic & Business, September 7th, 2015

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