All four units of Vedanta’s aluminium business slip into operational losses

With an almost 18% fall in aluminium prices in the past six months on the benchmark London Metal Exchange (LME), all four aluminium smelting units of Vedanta Ltd have slipped into operational losses.

Abhijit Pati, chief executive officer of Vedanta Aluminium, said there are chances that the firm’s operating profit will slip into the red this quarter.

The company has four aluminium smelting units—two at Jharsuguda in Odisha with an installed capacity of 500,000 tonnes per annum (tpa) and 1.1 million tpa, and two units at Korba in Chhattisgarh with an installed capacity of 245,000 tpa and 345,000 tpa. It is currently operating at a little less than 50% capacity utilization and there is a possibility of a further cut in production if LME prices keep falling.

Vedanta Ltd, which has a consolidated debt of INR 77,752 crore and a net debt of Rs.31,450 crore as on 31 March, was battered all of last fiscal year with a fall in the price of crude oil. Since the beginning of the current fiscal year, the price of aluminium on the LME started to decline, leading to a further dent in revenues, profits and share price.

Since the beginning of the fiscal year, the price of a Vedanta share has fallen by 50% to Rs.94.75, mainly on account of the fall in the price of aluminium and crude oil. Its aluminium business was hit hardest in the first quarter, with operating profit falling to $1.9 million from $88.4 million a year ago. Revenue of the business was down 2% to $430.4 million in the June quarter from $438.5 million in the same period a year ago.

“Not only the LME price of aluminium but also the premium on aluminium, which is different in different regions of the world, has fallen drastically,” Pati said over the phone from New Delhi after submitting a representation from lobby group Aluminium Association of India to the government for doubling import duty on aluminium from 5% to 10%.

He explained that in the fourth quarter of last year, aluminium on LME was priced at $1,800-1,900 per tonne. At that time, the premium was at $325 per tonne, so the final price that the company was getting on sale of hot aluminium metal was at $2,125-2,225 per tonne. This was at a cost of production of about $1,800 per tonne, helping the company make a profit of $300-400 per tonne.

Now, with LME aluminium prices at $1,540 per tonne and the Indian premium at $100 per tonne, the company is getting $1,700 per tonne against a cost of production of over $1,800. “So you can see I am making a loss of $100-250 per tonne,” he said and added that this has hurt not just Vedanta Aluminium but the entire industry. Analysts are, however, wary of the government taking any step at the behest of aluminium producers.

While the company and the association remain hopeful that the government will announce some relief for aluminium producers, the firm has also started taking measures to stem further losses, Pati said.

Vedanta, he said, is trying to sell more in the domestic market as the premium on aluminium in the domestic market still gives $60-70 per tonne higher returns. Also, the company is looking at increasing its share of value-added production of aluminium products such as ingots, billets, alloys, etc.

“Currently, our 100% focus is to increase our value-added production from 40% to 56-58% in the next few months,” he said.