Alumina on a boil due to deficit

International alumina prices, the

intermediate product from which

aluminium is smelted, got a major leg-

up in the wake of an explosion at the

Louisiana-based 1.2 million tonne

Gramercy refinery in July 1999. At the

time of the accident, Kaiser owned

Gramercy. The plant was subsequently

jointly taken over by Century Aluminium

and Noranda. Alumina prices softened

afterwards. But then 2003 onwards, the

growing Chinese hunger for the raw

material and the sustained global

improvement in demand saw alumina

prices clawing back to the post-

Gramercy disaster level.

The 10 per cent growth in world

demand in 2004, followed by a 5 per

cent rise last year, saw demand for

alumina move ahead of supply. A recent

report by Australia-based AME Mineral

Economics says, “The current

desperate deficit of alumina” will

continue through 2007 supporting

“extremely high spot prices”. But

alumina being largely sold on long-term

contract basis with provisions for price

escalation at agreed intervals,

producers benefit from the tightness of

the spot market when contract prices

come up for revision. Demand

remaining strong and spot prices high,

alumina producers are now able to

wrest a higher percentage of LME

metal prices for both long-term and

short-term alumina contracts from

smelter owners than before. However

Benefit to Nalco :

During 2005, Global alumina

consumption at 58.157 million tonne

was ahead of production by 2,51,000

tonne. The 87 per cent government-

owned National Aluminium Company

(Nalco) here is a beneficiary of

alumina's bull run. This is because the

Nalco refinery generates over

9,00,000 tonne of exportable alumina

surplus after feeding the in-house

3,45,000 tonne capacity smelter. All

Nalco facilities covering the entire

spectrum from mining of the mineral to

alumina refining to metal smelting are

in Orissa where half of the country's

bauxite deposits are to be found.

marginal alumina shortages may be,

the underlying sentiment will help

producers get it incorporated in future

contracts that buyers will have to defray

cost increases under certain heads

during contract periods.

Being a government company, Nalco

had all along exercised extreme

caution by pegging 90 per cent of its

alumina exports to long-term contract

sales. It is only now that the Nalco

management has secured the mines

ministry's approval to keep 20 per cent

of alumina exports for spot sale.

But good times for alumina are

likely to come to an end by 2009 when

much of the new capacity in the

pipeline or projects awaiting statutory

clearances in south and central

America, Australia, China and India

wil l be in operation. Demand

outstripping supply and a long run of

high prices have created the heady

condition for large new investments in

alumina refining creation. In the

meantime, however, creation of

alumina refining capacity either

through expansion at existing sites or

by building greenfield plants is

7

F o c u s

becoming more and more capital

intensive, thanks to steel cost inflation

and mounting labour bill.

New capacity :

But if, as AME Mineral estimates,

the “almost certain projects” will create

capacity of 14.31 million tonne and the

“probable” ones another 7.8 million

tonne. The two lists include a number

of alumina projects in India.

Surprisingly, however, Nalco's

b rown f i e l d a l um ina capac i t y

expansion to 2.1 million tonne from

1.575 million tonne by 2009 is not

included in the list. The world alumina

refining capacity climbing to 87 million

tonne by 2010 from 64 million tonne in

2004 is to be taken for granted. The

way capacity is set to grow will create a

surplus of at least 6 million tonne by

2009 putting pressure on prices. But in

case the “possible” projects now at

early development stages see the light

of day, then the capacity will be a

staggering 111 million tonne. From

here, alumina capacity will grow at a

CAGR of 6.6 per cent and this is a lot

higher than the 4.8 per cent CAGR

forecast for primary aluminium

production.

The latter scenario will lead

refiners to operate at lower efficiency

levels than at present to arrest price

falls. And unlike the current scene

when refiners are under pressure to

honour delivery commitments, the

post expansion period will see rise in

alumina stockpile. What will, however,

give relief to refiners committing big

funds for expansion is that they are

able to make metal producers

concede high contract rates for long-

term supplies. India still does not have

any standalone alumina refinery. All

refineries here have been built as

adjunct to smelters. The only

significant Indian alumina exporter is

Nalco. Even while India is sitting on the

world's fifth largest proven bauxite

deposit of 2.3 billion tonne, we don't

have refineries of sizes of Alunorte and

Alumar in Brazil or Queensland

Alumina in Australia.

Fresh actions :

Whatever it is, India should now be

seeing lots of action on the alumina

front. Foreign majors such as Dubai

Aluminium, Rusal and Alcan are

eyeing slices of Indian bauxite

deposits as much for their large

occurrences in single long stretches

as for their high alumina content and

easy digestibility. It is only to be

expected that because of its richness

of bauxite wealth, most foreign groups

will be descending on Orissa, where

the government is finally showing a lot

of initiative to build minerals-based

industries such as aluminium and

steel. But what continues to baulk

many of the investment plans is the

unflagging agitation by NGO-backed

tribal groups. Orissa government

officials will admit that bauxite mine

development work in the newly

allotted sites could not start because

the tribals and other villagers who will

be required to vacate land find

compensation under rehabilitation

schemes inadequate. This is now

sought to be corrected through

negotiation. Arbitrariness on a

sensitive issue such as rehabilitation of

displaced people does not help.

The classic case of a potentially

successful bauxite mining cum

alumina refinery project suffering a

time overrun of over a decade because

of mishandling of rehabilitation issue is

Utkal Alumina. Norsk Hydro, one of the

two foreign promoters, called it quits

because of this reason. But once

Hindalco came on board by virtue of its

first taking over Indal, an original

promoter of the venture, and then

subsequently buying out Hydro's 35

per cent ownership, the project once

again got going. Hindalco now owns

55 per cent of Utkal Alumina with Alcan

of Canada owning the rest. Utkal

Alumina has been allotted deposits of

about 200 million tonne in Orissa's

Baphlimali hills. The reserve will last

over 40 years to run a 1.5 million tonne

alumina refinery. But the Orissa

government should know that much

bigger refineries in Brazil and Australia

have linkages to deposits which will

last a century and more.

F o c u s

8