Muted alumina prices dent Nalco's Q1 earnings as global supplies stabilise

Depressed global alumina prices have posed a daunting challenge to state-run producer National Aluminium Company (Nalco) to sustain its high profitability and earnings performance of FY19.

During the last fiscal, when spot alumina prices were on a roll and peaked at multi-year highs of over $600 per tonne, Nalco made the most of it, opting to sell all its shipments of surplus alumina in the spot markets instead of clinching bilateral pacts with select buyers. The boom in prices helped Nalco achieve its highest-ever realisation from alumina sales, propelling the navratna company to a decade-high net profit of Rs 1,732 crore in 2018-19. Nalco also closed last financial year with revenue of Rs 11,499 crore.

The slide in Nalco's performance began in Q1 of FY20, after global alumina supplies had amply stabilised following the withdrawal of sanctions on UC Rusal by the US treasury and Norsk Hydro's Alunorte refinery in Brazil on course to regain full-scale alumina production. Alunorte refinery, with a peak production capacity of 6.4 million tonnes per annum (mtpa), is the biggest alumina refining complex in the world and its supplies hold the key to influencing price dynamics.

In April-June quarter, Nalco could manage only a Rs 97.78-crore net profit, as weak alumina prices crimped earnings. From the multi-year highs of around $600 last year, average international alumina prices were hovering around $300 in September 2019.

"For Nalco, Q2 is no less challenging. The company faces headwinds in the form of depressed alumina prices, sobering LME (London Metal Exchange) prices and soaring imports of aluminium into the country. Over the years, alumina has been driving Nalco's profitability and the PSU is still struggling to turn profit from its aluminium business," said a metals focused analyst.

Nalco's chairman & managing director T K Chand could not be reached for comments. Phone calls and text messages to him remained unanswered.

Indeed, alumina exports have kept the cash flows swelling for the aluminium major. Nalco ranks among the top three central public sector enterprises (CPSEs) in the country with earnings in excess of Rs 45 billion in FY19.

Though Nalco has charted a new business model to make the company immune to vagaries of metal sector business, the plans are expected to take two to three years to deliver outcomes.

Both in alumina and bauxite production, Nalco trumped global peers to rank as the lowest cost producer in calendar 2018, according to a study by global consultancy firm Wood Mackenzie.

Nalco has placed high stakes on backward integration to cut costs. In a joint venture with Gujarat Alkalies and Chemicals Ltd, the navratna company is putting up a caustic soda facility in Gujarat. Separately, Nalco is also aiming to commence mining from its captive coal mine in this fiscal -- a milestone that will help it prune aluminium making costs by 25 per cent.

The new business plan also has headroom for diversification, wherein Nalco is looking to enter lithium-ion cell manufacturing in Odisha. It has also forged a joint venture, Khanij Bidesh Nigam Ltd (KABIL), with Mineral Exploration Corporation Ltd (MECL) and Hindustan Copper Ltd (HCL). The JV is tasked with hunting and acquisition of strategic mineral assets abroad.

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