Nalco could gain from taking greater risk

As is commonly the practice of government undertakings in this country, National Aluminium Company (Nalco), owning Asia's largest integrated aluminium complex, would rather err on the side of caution than take the risk of selling most of its surplus alumina, the smelter feedstock, in the world spot market by inviting tenders for lots. This is in spite of the fact that in the last five years, alumina spot prices ruled a lot higher than what Nalco could realise from term contract sales. For the last lot sold a few days ago, Nalco got an FOB price of $457.57 a tonne in what turned out to be a keenly contested bid. We learn that Aluminium Baharin, which has long-term alumina supply arrangements with Alcan and now owned by Rio Tinto, put in the second highest bid for the Nalco lot at $455 a tonne. The keenly contested bid goes to prove that alumina prices are finding support at rising levels because of supply crunch. Chinese slump According to Nalco Marketing Director P K Parida, the earlier three alumina sales in this financial year were done at $403.09, $427.77 and $425 a tonne. Interestingly, the underlying sentiment of the world market for alumina has remained bullish in spite of Chinese imports in the first four months of 2008 falling 300,000 tonnes to 1.7 million tonnes over the corresponding period of 2007. The fall in Chinese alumina imports should be seen in the context of several white metal producing provinces ?particularly Sichuan and Guizhou had to contend with severe snowstorms and coal-fired power outages hitting smelter operation. Reaching alumina to the smelters became an issue as railway wagons were primarily used for moving food and other essential items to snowstorm-hit areas. Trade officials say the production will be back to the normal level soon. Even then, in some parts of the country, as the "urgent electricity use scheme" remains in force, aluminium smelters do not get all the power that they need. All the negative factors combined could see the Chinese primary aluminium production falling as much as 600,000 tonnes this year over the 2007 output of 12.572 million tonnes. This will, no doubt, translate into China importing less alumina. Alumina exporters like Nalco will also have to take into account that the Chiping Guangxi alumina refinery of 1.6 million tonnes capacity in China will be ready for production in the next few months. The country's largest aluminium producer, Chalco, is also to commission a bauxite mine-cum-alumina refinery in Nanchuan by 2008-end. Bright future In spite of it owning poor-quality bauxite, China is seeking greater self-reliance in alumina. Many refineries in China depend on imported bauxite, notwithstanding the difficult logistics and high freight element. The last few years have seen China growing both alumina refining and metal smelting capacity at an astonishing speed. Parida informs that since March 2004, China's alumina capacity has risen from 7 million tonnes to 24 million tonnes and metal capacity from 5 million tonnes to 15 million tonnes. Much to the surprise of the industry in India, where the minimum gestation is four years, a greenfield refinery is built in China in 12 months and a smelter in 18 months, says Nalco Executive Director P K Padhi. Trade officials think the market has already discounted the prospect of China doing with lower imports of alumina this year. London-based CRU International says, "Alumina prices will remain firm in the coming months. At the same time, rising cost pressures will act as a platform to provide support to prices." It is only natural that refineries will be seeking compensation for cost rises on account of fuel, power and freight. At the same time, as CRU points out, the general tightness in supply has taken bauxite prices to $40 a tonne ( FOB India). Delivered bauxite cargoes from India to China are costing up to $80 a tonne CIF. As for China receiving the mineral from Australia and Indonesia, the CIF cost ranges from $63 to $73 a tonne. Trade sources say while Chinese smelters to the extent that they don't have linkages to captive alumina supplies will be paying up to $515 a tonne for locally-made alumina. The imported stuff could cost anything between $554 and $561 a tonne. Nalco chairman C R Pradhan has reasons to be mighty happy with the world alumina price behaviour since his company annually exports about 800,000 tonnes of alumina. It is another story that Nalco could earn a lot more revenue and profits had it been making greater use of the spot market. One wonders if the Navaratna status that the government has now accorded to Nalco will whet the risk-taking appetite of the PSU and lead it to sell a much bigger portion of the exportable alumina on spot basis. The subject assumes special importance in the light of Nalco's alumina surplus rising to 1.2 million tonnes by early next year on completion of the second phase of expansion. Source: business-standard