The cancellation of coal blocks likely to raise Hindalco’s cost of production

Market analysts predicts that Hindalco Industries is likely to suffer higher production costs after the Supreme Court cancelled the four coal blocks, Mahan, Tubed, Talabira-1 and Talabira-2 allocated to the company.

Hindalco had been enjoying a low average production cost, among the lowest in the industry, of INR 1,700, per tonne before the cancellations. Since coal and power take up nearly 35% of the production costs, the uncertainty surrounding the coal supply will definitely hamper the cost of production.

The originally Hindalco allotted mines have now been handed over to other regulated sectors which means they are out of reach for Hindalco and the company needs to bid for other mines that are not as close as the previous ones were.

Antique Stock Broking Ltd. submitted a report on 23rd December which states that the closest available coal blocks for Hindalco’s use are located at a distance of between 100km and 700km from the location of the Madhya Pradesh and Odisha’s smelters. This will definitely push up logistic costs and every additional 100 km of transportation of coal through road or rail is likely to push up the cost of coal by an additional INR 500-1,000 per tonne depending on the mode of transport.

Hindalco was not available for comment owing to its customary silent phase before the declaration of the quarterly results. However, the impact of the coal issue will not be clear until new coal agreements are decided and the new mines are allotted to the company via auctions scheduled to be held in February.