Nalco looking at Oman and Iran for $3bn smelter due to coal shortage in India

Domestic coal shortages are prompting India’s National Aluminium Co (Nalco) to plan construction of a US$3bn smelter complex abroad, possibly in Oman or Iran, underscoring the task Prime Minister Narendra Modi faces to boost energy output.

Indonesia, Vietnam, Malaysia and UAE are other potential sites for the 500,000 metric tonnes smelter and a 1,000MW captive power plant, Nalco chairman Ansuman Das said in an interview. He didn’t give a timeline for the project by the state-run maker of a metal used in everything from beer cans to aircraft and cars.

“We are facing a massive energy challenge in India,” Das said. “That’s the reason we are looking at these countries, which have abundant energy resources.”

Using imports to make up for a lack of sufficient local coal output is too costly, Das said, signalling the challenges for industry from a 23 per cent national shortfall in domestic supplies. While Modi has pledged to fix energy woes over time, graft probes, environmental objections and slow land acquisition are holding back efforts to mine more of the fuel.

Nalco shares have surged 47 per cent in 2014, exceeding the 21 per cent rise in the benchmark S&P BSE Sensex. Aluminium has climbed about 13 per cent this year, and Nalco may report a R1.78bn (RO11.2mn) profit in the April to June period, the highest in three quarters, based on the median of 12 analyst estimates.

The shares fell as much as one per cent today to R56.30 in Mumbai.

India produced 565.6mn metric tonnes of coal in the 12 months through March 2014, compared with demand of 739.4mn tonnes. Supplies to captive power plants dropped 31 per cent to 37.80mn tonnes, according to the Power Ministry.

Making aluminium with imported coal isn’t viable as it costs US$1,900-US$1,950 a tonne, about US$250 more than with local coal, Barclays Plc estimates. Electricity accounts for almost 40 per cent of smelting costs.

That’s why access to cheaper energy is crucial, said Giriraj Daga, an analyst at Nirmal Bang Equities Pvt in Mumbai.

“Nalco has been trying to go overseas in search of gas or coal,” he said. “If all goes well, then they should be able to make decent return on equity.”

Building a plant in Iran depends in part on nuclear negotiations between it and six world powers. The talks could lead to an easing of sanctions on the nation, which the US Energy Information Administration estimates holds the world’s second-largest natural gas reserves.

Iran may boost its natural gas-fired electricity and nuclear power if the talks succeed, making the nation a 'great destination' for aluminium smelting, said Kenneth Hoffman, a Bloomberg Intelligence analyst in New Jersey.

Modi swept to India’s first single-party parliamentary majority in 30 years after general elections over April and May. He pledged R1.48tn last month to unclog transport links, spur power output and build cities, while also loosening restrictions on foreign investment.

The prime minister on Tuesday visited Jammu & Kashmir to unveil two hydroelectric power plants and lay the foundation stone for a 375km transmission line.

Even so, the rupee has weakened four per cent against the dollar since Modi was sworn in on May 26, the most in Asia, amid concern he may fail to implement the overhauls as quickly as some investors had expected. A proposed increase in the cap on foreign investment in insurance, for instance, has yet to get parliamentary assent.

Bhubaneswar, Odisha-based Nalco, which has been forced to idle some capacity at home because of an increase in energy costs, has tried to expand abroad for a decade to boost fuel-supply security.

Obstacles in India include coal supply disruption at Nalco’s captive power plant in Odisha, Das said in the July 31 interview in New Delhi. The eastern state faces militant attacks by Maoist rebels. Coal India’s personnel director R Mohan Das said on Monday that its Odisha unit, which supplies to Nalco, faces law and order disruptions.

A report evaluating overseas locations for the planned smelter will be ready in about two months, Nalco’s Das said.