Corporation tax rate cut to help Nalco tide over sagging alumina prices

The Union government’s move to cut corporation tax rates is expected to offset National Aluminium Company’s (Nalco) loss from headwinds like sagging spot alumina prices and subdued prices of aluminium on the London Metal Exchange (LME).

Each year, Nalco exports over one million tonne of surplus alumina, preferring to sell entirely on the spot markets instead of sealing long-term contracts. The strategy paid off for Nalco in FY19 where it closed with a decade high net profit of Rs 1,732 crore and also posted its highest ever realisation of over $700 from alumina sales.

However, alumina prices have started sobering with the withdrawal of sanctions levied on UC Rusal (the single largest producer outside China) by the US treasury and Norsk Hydro’s Alunorte refinery in Brazil en route to its peak rated capacity of 6.4 million tonnes of alumina. As global alumina supplies stabilised, Nalco has found it profoundly difficult to sustain the high profit momentum of last fiscal.

On a year-on-year basis, spot international alumina prices have tanked by a half in the past 12 months, currently hovering around $300 per tonne. The subdued alumina prices have crimped earnings for Nalco which had to contend with a modest net profit of Rs 97 crore in Q1 of FY20. Nalco’s performance in Q2 too, is anticipated to be muted as alumina prices continue to be fragile and LME aluminium prices have not looked up to the point which solaces Indian smelters. Aluminium prices on the LME for the cash buyer stood at $1728 (as on October 18), exerting pressure on margins of Indian aluminium makers who are finding it tough to contain costs of metal production as power costs escalate. Moreover, at this prevailing price point, about 10 per cent of the global aluminium smelters are incurring cash losses.

But Nalco can take a breather from the government’s decision to pare corporation taxes, an analyst said.

“In FY19, Nalco’s tax rate was 36.8 per cent. Post the restructured corporation tax rates, the effective tax rate for the company will be 25-26 per cent. The company will profit from this tax rate cut and the performance will be reflected in Q3 and Q4. This will help Nalco to combat the headwind of plummeting alumina prices”, he explained.

Nalco’s chairman and managing director T K Chand or the director (finance) were not immediately available for comments.

For the navratna company, the other comforting factor is the aluminium prices nearly bottoming out. From ruling at $2500 in April last year, aluminium prices have amply corrected to their present level. In the June quarter of this fiscal, when the LME aluminium prices averaged at $1792 per tonne, Nalco still managed to generate quarterly Ebitda (earnings before interest, taxes, depreciation and amortisation) of Rs 215 crore on a turnover of Rs 2080 crore.

Though the slash in tax rates will help Nalco shore up margins, the company has to be wary of a tumultuous scene in its smelter operations at Angul (Odisha).  An acute coal crisis has stalked the aluminium smelter plant with Nalco forced to shut out 80 electrolytic pots with the possibility of turning up to 227 pots offline if the coal crunch goes on unabated. Against its normative coal requirement of 17,000 tonnes per day, Nalco is getting only 8000-9000 tonnes from Coal India Ltd’s (CIL) subsidiary Mahanadi Coalfields Ltd (MCL), its only source for drawing the dry fuel. Three of Nalco’s Captive Power Plants (CPP) remains shut now with Nalco being compelled to purchase expensive power from the state grid.

Unless Nalco is able to navigate the existing coal crisis emanating from disruptions at MCL’s mines, its aluminium production costs are bound to jack up, pressuring margins.

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