By Arun Bhatt* in Bhubaneswar, January 19, 2018: 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).
• The LME prices for Aluminium have increased by $251/MT (from $1850/ MT in Q-4 FY 2016-17 to $2101/MT in Q3- FY 2017-18).
• The overall increase in production costs is more than 30% i.e. avg $514/ MT for the overall industry which is adversely impacting the sustainability of aluminium industry.

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

1. Cess on coal introduced in 2010 as Rs 50/ MT, increased to Rs 400/MT in Union Budget 2016-17.
2. Coal costs have increased due to domestic coal shortage for industry and very less quantity offered for spot auction (price increased from ~Rs 0.80/ GCV to ~Rs 1.25/GCV) – impacting 40%-50% aluminium capacity
3. Electricity Duty increased in Odisha in May’17
4. Evacuation Facility Charges on Coal introduced by Coal India w.e.f 20th December, 2017.
5. CRU Monitor- Alumina Price Index (API)
6. Import duty on CP Coke increased from 2.5% to 10%on 14th December, 2017.
7. Caustic Soda price escalation not included in total impact on Aluminium cost since it is component of Alumina cost

In the Union Budget 2016-17, the increase in duty on aluminium by 2.5% was completely negated by the 100% increase in Clean Environment Cess on coal from Rs. 200/ MT to Rs 400/MT.
• The cess & duties have increased the cost of production by more than 10% with annual impact on aluminium producers of Rs.3000 Cr. at current 3 mtpa production and Rs.4,000 Cr. at full capacity.
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 waived 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) has brought forth a few important issues distressing the domestic industry. Domestic value addition of locally produced bauxite, alarming threat from increasing scrap imports has also been highlighted in addition to the rise in input costs. Immediate support sought from the Government in the upcoming Union Budget 2018-19 is mentioned as follows:

• 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 Indian Aluminium producers have made large investments of Rs 1.2 lakh crores to enhance total domestic capacity from 2 MTPA to 4.1 MTPA, with a total debt on the industry at Rs 70,000 crores. 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.

The industry has created over 8 lakh job opportunities (direct & in-direct) in the country, triggering the development of hundreds of SMEs in downstream sector. This has had a huge multiplier effect for creating jobs in other sectors, especially in MSMEs. With the current capacity utilization of less than 70%, the Indian Aluminium Industry has the potential to add another 2 lakh jobs at full capacity utilization.

*(Head, Corporate Communications at Vedanta Aluminium)

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