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Indian aluminium industry reeling under increased production costs despite LME upswing

Source: Money Control | January 18th, 2018 | By Arun Bhatt
Location: India
Industry type: Aluminum Industry

Trapped in a pincer of rising coal prices and flooding of cheap imports, domestic aluminium industry needs government policy support to come out of this crisis.

During the last four years Indian aluminium producers have made investments of Rs 1.2 lakh crore to enhance total domestic capacity from 2 MTPA to 4.1 MTPA, with a total debt on the industry at Rs 70,000 crore. The installed domestic aluminium capacity in the country stands at 4.1 million tons/annum against the current domestic demand 3.3 million tonnes/annum implying that there is sufficient domestic capacity to cater 125% of India’s aluminium demand.

Yet, the distressing fact is that 50% of Indian Aluminium consumption is being met through imports mostly from China and Gulf. What is even more revealing, and damaging to the cause of Make in India Aluminium, is the fact that 50% of these imports constitutes of “scrap” which attracts lesser duties. This clearly is crippling the domestic aluminium industry.

The relief that the ailing Indian Aluminium Industry was supposed to get from the upswing in global aluminium prices (LME) has been marred by increasing production costs over the past few quarters in FY 17-18. Despite the LME prices swinging on a record high in this current period, the domestic industry continues to reel under increasing input costs.

In the past couple of years, the production costs of the metal has significantly increased due imposition of various cess and increased duties, along with substantially increased input costs and escalated prices of critical raw materials like Coal, Alumina, CP Coke, Caustic Soda etc. with associated logistic costs. These have adversely impacted primary aluminium making costs, thereby depriving the domestic producers to capitalise on the favourable market opportunity.

The increase in input costs by $730/MT completely offsets the increase in aluminium LME price ($251/MT)

Particulars Previous Current Sp. Consumption/ MT of Aluminium Impact on Aluminium COP  ($/ MT)

Cess on Coal1

(introduced in 2010)

Rs 50/ MT Rs 400/ MT 11.73 MT $64/ MT

Coal Prices2

 (Import/ Spot Auction)

Rs 2400/ MT Rs 3900/ MT 11.73 MT $247 /MT

Electricity duty3

(increased in Odisha)

Rs 0.30/kwh Rs 0.55/kwh 14500 kwh $56/ MT
Renewable Power Obligation (RPO) Nil

3% for Solar

4.5% for non-solar

14500 kwh $20/ MT
Evacuation Facility Charges4 on Coal by Coal India 0

Rs 50/ MT

(w.e.f. 20.12.2017)

11.73 MT $9/ MT
Alumina5 $271/MT $400/MT 1.92 MT $248/ MT
CP Coke Rs 19,829/MT Rs 26,122/MT 460 kg $43/ MT
Import Duty on CP Coke6 2.5% 10% 460 kg $15/ MT
CT Pitch Rs 24,974/MT Rs 40,645/MT 110 kg $27/ MT
Caustic Soda7 Rs 29,281/MT Rs 35,935/MT 200 kg $21/MT*
Total Impact $730/ MT


*Caustic Soda price escalation not included in total impact on Aluminium cost since it is component of Alumina cost

A declining trend in the domestic market share is also a grave concern for the Indian Aluminium Industry. According to the Aluminium Association of India (AAI),

• Imports increased from 878 kt in FY-11 to 1750 kT in FY-17 (at 12% CAGR) (mainly from China & Middle East)

• Domestic Aluminium Producer’s Market Share is down from 60% to 47%. The capacity utilization of Primary producers is just less than 70%.

Globally, countries are supporting their domestic aluminium industries through concessions/subsidies – cheaper power, tax benefits, VAT rebates etc., bringing down the production costs and rendering global competitiveness. While other countries like China, Middle East offer incentives and subsidized power to Aluminium smelters bringing down their production costs, in India the industrial power cost is very high. For example, the Chinese government has directed loans and subsidies on power, coal, alumina etc. to help the domestic producers. Power tariff subsidies accounting to around $200/MT in aluminium production costs, 13%-15% export tax rebate & favourable terms of credit on exports of semi-fabricated Al products in addition to totally waivered off import taxes on alumina and bauxite making them competent enough to dictate global prices. Similarly, in the Middle East, the national government supports investment in their aluminium industry as most smelters are government owned. Energy subsidies through preferential Natural Gas allocations at lower prices with long-term supply agreements also alleviate input costs.

The Aluminium Association of India (AAI) looks forward to Government support through the following measures:

• Increase in import duty on Aluminium scrap (HS Code 7602) at par with primary metal (proposed to 10%).

• Increase in import duty by 2.5% (10% to 12%) across Chapter-76 (Aluminium & articles) for 7601, 7603-7616.

• Increase export duty on Bauxite ore (HS Code 260600) from 15% to 20% to encourage domestic value addition.

• Reduction in basic custom duty on critical raw materials for aluminium industry value chain: Alumina (28182010)- 5% to Nil, Coal Tar Pitch (27081090)- 5% to 2.5%, Caustic Soda Lye (28151200)- 7.5% to 2.5%, Aluminium Fluoride (28261200)- 7.5% to 2.5%, Anodes (8545 19 00)- 7.5% to 2.5%.

• GST Compensation cess on coal (Rs.400/MT) to be eliminated to support power intensive industries.

(The author is Head, Corporate Communications at Vedanta Aluminium)

*Original article online at http://www.moneycontrol.com/news/business/companies/indian-aluminium-industry-reeling-under-increased-production-costs-despite-lme-upswing-2485717.html