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Vedanta to save Rs 800 per tonne in long-term bauxite deal with OMC

Friday, Apr 13, 2018

   After years of struggle to secure raw material for its Lanjigarh alumina refinery following Niyamgiri fiasco, Vedanta has finally clinched a deal with state-owned Odisha Mining Corporation (OMC) for the supply of bauxite to its beleaguered plant.

  As a result of this deal, Vedanta is expected to get 0.8 million tonnes of bauxite from the OMC in the current financial year at a price, which is estimated to be Rs 700 to Rs 800 per tonne cheaper compared to the landed cost of bauxite at the Lanjigarh plant site at present.
  In the first-ever auction of bauxite at the country, Vedanta, along with Hindalco and Anrak Aluminium, have snatched up 0.19 million tonnes of bauxite offered by OMC from its newly opened Kodingamali mines in Koraput district.
  In the process, OMC has discovered the rate for long-term supply of bauxite to Vedanta, which is estimated at about Rs 465 per tonne at the pithead excluding the royalty payment to the state government and statutory contribution to district mineral foundation (DMF) and National Mineral Exploration Trust (NMET) fund.
  In the auction, while two units of Hindalco (Belgaon and Muri) picked up 0.105 million tonnes of material with a quote of Rs 462 per tonne, Vedanta has booked 20,000 tonnes of bauxite at the same rate. The other participant, Anrak Aluminium from Andhra Pradesh has lifted the rest 65,000 tonnes at a price of Rs 472 per tonne.
  "Hindalco and Vedanta clinched the deal at the floor price which was the cost of raising bauxite plus 50 per cent margin for OMC", said a government official.
  The mining cost for Vedanta's competitors, like Nalco and Hindalco, which have captive mines, hovers around Rs 350 per tonne.
  The pithead cost of bauxite is expected to go up by another Rs 200 per tonne after the payment of royalty and contribution to DMF and NMET.
  While allowing OMC to go for auction of bauxite from its Kodingamali mine, the state government had reserved 70 per cent material raised from the mine for long-term supply while setting aside only 30 per cent output to be sold through auction. It had asked OMC to discover the price for long-term supply based on weighted average of the price quoted in the auction.
  Given the above quotes in the first auction, the weighted average rate comes to Rs 465 per tonne, at which OMC will sell the bauxite on long-term contract till the next auction happens six months after.
  The government notification also stipulated that the industries with their plant inside the state and not having captive bauxite mine will be prioritised for a long-term supply contract. This makes Vedanta the only company, among all those who participated in the auction, with whom OMC is expected to enter into a long-term contract for the sale of 70 per cent of the mine's output.
  In addition to the long-term contract price and statutory payments, Vedanta is likely to spend Rs 1,200 for transportation of bauxite to the Lanjigarh plant from the mine, which is about 120 km away. Put together, the cost of bauxite at the plant site is estimated at about Rs 1,900 per tonne, which is still cheaper by about Rs 700 to Rs 800 per tonne at which the company is getting bauxite now, said an analyst.
  Unable to source raw material within Odisha, Vedanta is bringing bauxite from different states in India and Guinea, outside the country, to keep its Lanjigarh refinery afloat. The plant, with an installed capacity of 2 million tonnes of alumina output per annum, is running at about 50 per cent capacity.
  OMC mine is expected to meet a portion of Lanjigarh plant's requirement that requires 6 million tonnes of bauxite to run at full capacity. The Kodingamali mine with a deposit of 81 million tonnes has environment clearance (EC) to produce 3 million tonnes annually. But due to logistics bottlenecks, OMC intends to produce 1.26 million tonnes in the first year which would be stepped up gradually. That means Vedanta would get 0.8 million tonnes in the initial year which go up as OMC ramps up production.

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