Split rhythm in smelters

With a sharp focus on the domestic market, Indian non-ferrous metal players are yet to make a mark on the global stage, says Ajoy K Das.

The Indian metal band is reverberating, but to a different rhythm. On the non-ferrous metal stage, the copper quartet-Hindalco, Sterlite, Hindustan Copper and the Jhajadia-owned SWIL Ltd- are beginning to play global tunes. So what if India has some of the poorest copper deposits in the world?

At the same time, the aluminium trio-National Aluminium Company Ltd (Nalco), Bharat Aluminium Company Ltd (Balco) and the Aditya Vikram Birla group's Hindalco continue to play to an ever-growing domestic audience. This, despite India accounting for 5% of the world's best bauxite deposits, and being one of lowest-cost producers of alumina (an intermediary between bauxite and primary aluminium).

The two major non-ferrous metal industries couldn't have been more different. Aluminium, with all the inherent natural advantages of high metal content in Indian ore and reserves, is cocooned in the comfort of domestic demand. But refined copper producers are emerging as global players, ready to ride the bull run at the London Metal Exchange (LME), fuelled by China's burgeoning appetite for the metal. And all this after reversing the scenario of domestic shortage to a surplus situation.

Until a few years ago, the 47,500-tonne production capacity of the sole state-run copper producer, Hindustan Copper Ltd (HCL) met 25-30% of the 2 lakh tonne domestic demand, while the rest was imported. Since 1992, with the entry of private players like Anil Agarwal's Sterlite Industries and Hindalco, the trend has reversed. Based on imported copper concentrate, the two entered the primary refined copper market in 1997 with an annual smelter capacity of 1 lakh tonne each.

Currently, the annual production capacities of these private players is 5 lakh tonne and 3 lakh tonne respectively, with SWIL starting a 50,000 tonne refined copper operations in Gujarat shortly. From shortage days of less than a decade ago, India's copper band now has the potential to touch 9 lakh tonne in a couple of years, catapulting India from a net importer to a net exporter.

There's no better time to turn an exporter than now, when Chinese demand has nudged copper prices up at the LME. From a spot rate of $3,757 per tonne in February 2005, it surged to $8,021 per tonne last month. Even so, refined copper exports have been rising, from 1.35 lakh tonnes in 2001-02 to 2.01 lakh tonnes in 2004-05. 

Analysts with HCL say: “In the coming years, India will be exporting an equivalent, or even higher quantity, of copper than domestic consumption of over 4 lakh tonne.”

The rapid growth of Indian copper production can be gauged by extrapolating export growth against the rise in consumption, projected to grow at 7% against a world average of 4%. The world production of refined copper falls short of demand, but this gap is declining. The total global shortage of refined copper, which was 8.43 lakh tonnes in 2004, narrowed to 1.32 lakh tonnes in 2005. This year's prediction is a 3-lakh-tonne surplus. But this is no dampener on LME, with Asia driving the demand.

The usage of refined copper decreased 1.4% in North America and Europe. This was offset by rising consumption in China and India.

India ‘s self-sufficiency and export movement is based on 80-90% copper concentrate (when ore is processed to increase metal content before smelting) imports.

India has few copper resources along the Singbhum copper belt of Jharkhand and the Khetri-Alwar belt in Rajasthan. Both these have low grades of copper with the average metal content at just 1%. But private sector refiners like Hindalco and Sterlite have skirted this inherent disadvantage by securing mining rights overseas to feed their Indian smelters.

Aditya Birla Minerals, a Hindalco subsidiary headquartered in Perth, Australia, has exploration and mining rights at the Nifty mines. Its copper concentrate feeds Hindalco's copper refinery at Dahej in Gujarat. Sterlite has mining rights at Mount Lyell in Tasmania and Thalanga mines in Queensland, Australia.

In sharp contrast to copper refiners' global ambitions, India's private and state-run integrated aluminium producers continue to remain domestic majors. The insular nature of the industry is reflected in the fact that since 1985-86, when the public sector Nalco became operational, not a single tonne of greenfield capacity has been added. Moreover, any production increase has been through brownfield expansions by Nalco and Hindalco. This, despite Indian producers being amongst the top five lowest-cost producers of alumina.

Neither have the integrated producers been able to establish linkages for Indian alumina to be converted into metal in energy cheap regions like the Middle East. “It is not economically viable as the carriage cost is very high,” says Debu Bhattacharya, managing director Hindalco. Naturally, domestic aluminium companies have remained fringe players in the international metal market.

Nalco has been receiving a number of overseas overtures from Qatar and Vietnam for collaboration to convert the company's alumina to metal in those countries. But with its global ambitions stymied by its public sector status, it continues to consolidate its position to meet domestic demand. There's a Rs 4,091-crore brownfield expansion to hike metal smelting capacity from 3.45 lakh tonnes to 4.6 lakh tonnes, and alumina refining from 15.75 lakh tonnes to 21 lakh tonnes.

Hindalco too has pledged Rs 7,700 crore for a greenfield smelting capacity in Madhya Pradesh. It's linked to the alumina to be produced by Utkal Alumina in Orissa, a joint venture between Hindalco and Alcan, Canada.

After several botched attempts to create a greenfield capacity in Orissa, Anil Agarwal's London-headquartered Vedanta Resources is setting up a1.4 million tonne alumina plant in Lanjigarh. This and another Rs 7,000 crore investment for smelting capacity will nestle under the Vedanta Aluminium banner.

Clearly, the Indian aluminium players' gameplans hinge on the 7-8% annual domestic demand growth, and riding the global boom in alumina. Alumina prices have moved to stratospheric levels of $650 per tonne from less than $400 in 1999.

It is evident from the planned projects that the players are working on. Their large capacities will not only feed captive smelters to produce metal, but also leave surplus alumina to be exported to lucrative markets like China, which are driving prices.

China, which imports around 60% of its alumina requirement, would buy around 9 million tonnes of alumina from the international markets. Little wonder that the world's largest aluminium company, Alcoa, US plans to raise alumina production by 40% to a whopping 22 million tonne.

With Indian companies not so well placed to turn big players in the global metal business, greenfield and brownfield projects will see a replay of the Nalco story. But now they are backing alumina which is emerging as a commodity in its own right, and using the residual to convert to metal catering to domestic demand.