'Soaring costs are killing Vedanta Alumina'

Business Standard, March 18, 2010
Mukesh Kumar, chief operating officer of Vedanta Alumina (VAL), is a worried man. The company’s 1-million tonne refinery in Lanjigarh, which began operations in September 2007, is losing $90 on every tonne of alumina it produces, owing to high input costs.


Vedanta had set a target of producing 2.5 million tonne of aluminium by 2012-13, but the cost of operations at VAL, which will feed its Jharsuguda smelter in Orissa and Balco in Chhattisgarh, is high. The 500,000-tonne Jharsuguda smelter — production is just half that figure now — is to be ramped up to 1.75 million tonnes, while Balco, 51 per cent owned by Sterlite, a sister concern of Vedanta, is scheduled to add a 325,000-tonne smelter to its existing capacity of 245,000 tonne.

“The remaining production is expected to come from some de-bottlenecking and will make India the world’s fourth largest producer of aluminium,” says a company spokesman.

VAL has already sought permission to ramp up its capacity to a whopping 6-million tonne.

But, with every tonne of aluminium requiring two tonne of alumina, this seems an ambitious target for the London-based Vedanta Resources, the parent company. The problem is bauxite, the primary raw material for making alumina. In an interview to Business Standard, Kumar revealed that VAL had notched up losses of Rs 500 crore since it began operations in August 2007. “We are already losing heavily, about $90 on every tonne of aluminium we produce because we source bauxite from Chhattisgarh, Jharkhand, Madhya Pradesh, Andhra Pradesh, Gujarat and Maharashtra. Transport costs have trebled the cost of bauxite and this is killing us.”

While global prices for alumina were an average of $ 200 per tonne, VAL’s production costs have hovered around $290. The cost of another input, caustic soda, is another critical factor.

The public sector Nalco in neighbouring Damanjodi spends just $20 per tonne on caustic soda, while VAL’s costs are $60. “Orissa has the best quality bauxite in the world, and because of this, consumption of caustic soda (used to remove the silica) is much lower. This enables Nalco to be the lowest cost alumina producer in the world, whereas we have become uncompetitive,” complains Kumar.

There’s clearly a compelling reason for VAL to kick off mining but allegations that it has contravened the Forest (Conservation) Act, 1980, may hamper these plans. Although the report submitted last Friday by the Chief Conservator of Forests J K Tewari has exonerated the company by saying “there is no violation with respect to the 660.749 hectares (mining lease area) of forest land,” it found there had been violations in an additional 33.73 hectares where pillars for a conveyor belt and a road have been constructed illegally.

But, the Orissa government has come out strongly to Vedanta’s defence. While Raghunath Mohanty, Orissa minister of steel and mines, has been defending the mining project vigorously in the Legislative Assembly and outside, senior bureaucrats have been campaigning to get the project approved by the ministry of environment and forests (MoEF). B P Singh, special secretary with Orissa’s forest and environment department, is said to have written repeatedly to the MoEF that there were no violations by the company involved in the mining of Niyamgiri.

The mining operation in Niyamgiri is a joint venture of the state-owned Orissa Mining Corporation (OMC) and Sterlite, in compliance with a Supreme Court decision that said Vedanta could not undertake the mining directly. The two have set up the joint venture South West Orissa Bauxite Mining Pvt Ltd in which Sterlite holds 76 per cent. Under the terms of the agreement with OMC, the corporation has to supply 150 million tonnes of bauxite to VAL, of which only 73 million tonnes will come from Niyamgiri.

Where is the rest to come from? Kumar shrugs aside the question, saying that is a question for OMC. But, there are other, more troubling questions over VAL’s projected six-fold expansion. The most important is about water. Alumina plants are water guzzlers and even though VAL claims its “zero discharge” technology – it is reportedly the only such alumina refinery in the country – allows it to cut water consumption by as much as a third, the water requirements for a six-million tonne plant would be at the very least 50,000 cmd (cubic metres daily). As it is, about 14,000 cmd is being pumped out daily from the Tel River, about 66 km from the refinery.

Geologist R Sreedhar, who heads the Delhi-based Environics Trust that has been studying the Niyamgiri project points out: “There is grave concern about the implications of bauxite mining on the water situation. Orissa is a highly water-stressed state and if water from the Tel river in the drought-prone Balangir is being drained for the water-intensive aluminium industry we could face a dangerous situation.”