Big Picture. Production costs take the sheen off aluminium

Domestic manufacturers of aluminium have been suffering losses for the past few years, mainly on account of increased cost of production.

The companies are not able to pass on the increased costs because sales are dependent on the LME (London Metal exchange) prices of aluminium, which considers the global supply and demand situation.

In a recent report titled ‘Need for an Aluminium Policy in India’, published on NITI Aayog website, authors state that India has the highest cost of production among the largest producers of aluminium such as Canada, Russia, West Asia, Norway and China. It adds that from 2003 to 2018, the metal’s cost in India, which increased 73 per cent, exceeded the rise in LME prices of aluminium, which grew 64 per cent.

This is impacting the profitability of Indian aluminium businesses, which are now gradually shifting their focus from upstream aluminium operations to downstream aluminium products which are independent of LME prices and on which costs could be transferred. The firms are also focussing on production and sale of aluminium’s raw material, alumina, the prospects of which looks more impressive than that of the white metal.

Below mentioned are the major elements pushing up the cost of production of the metal in the country, as per the report.

Higher taxes on mining

Aluminium is produced from alumina, which is derived from bauxite ore.

Mining of bauxite in India attracts high levels of royalty and taxes compared with other countries.

India charges ₹230 for every tonne of bauxite mined. Australia, the largest producer of bauxite in 2017, levies about 50 per cent lesser charges than India (₹120 per tonne). Other major producers levy much lesser — Brazil and Guinea charges ₹ 90 and ₹50 per tonne of bauxite, respectively.

Burdening power costs

Production of aluminium is a very capital- and energy- intensive process. Owing to this, producers of the metal usually set up captive power plants for their energy requirement, instead of depending on external sources. Higher duties are charged on electricity generated from captive power plants compared to external sources.

Also, higher cess and import duties on coal purchased to generate thermal power is impacting the competitiveness of the aluminum sector. In India, royalty and taxes as a percentage of ex-mine coal cost is 25-31 per cent, while it is 0-7 per cent, 12 per cent and 7 per cent in South Africa, Indonesia and Australia, respectively.

Further, the burdens of carbon tax and RPO ( Renewable Purchase Obligation), which mandates certain percentage of energy mix from renewable sources such as wind and solar, were pointed out as factors increasing the cost of power for producing aluminium. These lead to power constituting almost 30-40 per cent of the cost of production of aluminium.

Lack of infrastructure

Absence of railway connectivity and transport infrastructure in several mineral-rich areas of the country, which are typically remote, also adds to cost.

Poor rake availability affects coal and bauxite movement, and results in high working capital blockage.

Consideration to the above factors is necessary to salvage the Indian aluminium industry from further bleeding.

Given that India is blessed with rich and good quality coal and bauxite reserves, competitive advantage could be created for the industry by providing solutions to the above issues.

COMMENT NOW