Vedanta, Hindalco to continue with cost rationalization

India’s top two aluminium manufacturers - Vedanta Ltd and Hindalco Industries Ltd - are planning further cost cuts in the face of rising cheap imports from China and drop in price realizations - a situation that the steel sector too has been facing. More than half of the domestic demand for aluminium is now being met through imports. And in response to this, India’s biggest producer of aluminium Vedanta Ltd has already gone in for job cuts.

“Cost reduction drive will continue, job cuts have already been done. If the situation prevails, and if LME (London Metal Exchange prices) do not give us the support and if we do not get the intervention by the government, hard calls will need to be taken,” said Abhijit Pati, chief executive officer-aluminium, Vedanta Ltd in an interview over phone on Thursday.

So far, Vedanta has cut around 2,000 jobs across its aluminium business. In the last 12 months, LME aluminum prices have dropped 15.04 per cent. On Wednesday LME closed at $15,77.25 per metric tonne, down 12 per cent in the last twelve months. The falling prices have affected realizations as costs of inputs such as coal have risen because of the de-allocation of coal blocks following a September 2014 Supreme Court order.

Dropping realizations and rising imports have also hit stock prices. Vedanta’s share price fell 63.01 per cent in the last 12 months while Hindalco Industries Ltd, India’s second largest producer of aluminium, has lost 54.55 per cent. Both have fallen more than the benchmark BSE Metal Index, which is down 33.34 per cent over this period.

Pati does not expect any major improvement in the LME for the next 16-18 months time, suggesting that pressure on earnings of these companies will continue, unless the government steps in with a hike in import duties. At Hindalco, the stress in the sector has led to reduction in its contract labour force.

“We are doing people optimization. That has been the strategy than job cuts. We are trying to reduce contract labour and use our own people,” said Satish Pai, deputy managing director at Hindalco Industries Ltd in an interview over phone on Thursday. Pai added that the focus on overall cost optimization will continue.

According to industry lobby group Aluminium Association of India, the current industry utilization for primary aluminium manufacturing in India is less than 50 per cent. Of this, Vedanta Ltd’s Orissa aluminium facility is running at 33 per cent utilization level, while Hindalco Industries’ utilization stands at 80 per cent.

The share of domestic aluminium producers in domestic consumption has reduced to 44 per cent in 2014-2015 from 56 per cent in financial year 2010-2011, according to the association. “We have shut down one line in Hirakud. Right now we are on wait and watch, fairly hopeful of a respite soon,” said Pai of Hindalco while commenting on whether further production cuts are likely. Vedanta has ruled out production cuts but Pati said cost optimization process will continue.

The white metal manufacturers have now started discussions with the government for a hike in import duty. The association has also filed for a safeguard duty on import of aluminium in line with the safeguard duty provided to steel manufacturers in India. In September 2015, India imposed a provisional safeguard duty of 20 per cent on certain categories of steel products for 200 days.

“We are looking for an import duty hike from 5 per cent to 15 per cent on aluminium imports,” said Pai.

For the quarter ended 31 December 2015, Vedanta reported a small net profit of INR17.91 crore, a fall of 99 per cent from a year ago. Hindalco’s net profit of INR 40.46 crore was 89 per cent lower than the same quarter a year ago.

While aluminium manufacturers are expecting an import duty hike in the Union budget next week, there could also be some unpleasant surprises for the industry. A hike in coal prices, rail freight rates or the clean energy cess will further worsen the situation for sector as energy alone contributes 40 per cent to the total cost of production in aluminium manufacturing, says Pai.

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