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Mumbai: Aluminium producers in India, raising prices to compensate for the expensive coal they have to buy from the open market after losing captive coal blocks in a Supreme Court order last year, may be turning uncompetitive in the global market,said analysts.

The situation is expected to worsen once coal linkages allotted to these producers expire.

On 24 September 2014, the Supreme Court cancelled coal blocks allotted to private companies, including Vedanta Ltd and Hindalco Industries Ltd. Since then, coal blocks are being auctioned as part of a new policy intended to ensure better price discovery for natural resources.

Besides, coal linkages allotted to aluminium manufacturers expire by 2018—raising costs further as firms bid to retain their raw material linkages.

“Indian aluminium manufacturers, going forward, will lose out on the global cost efficiency with the increase in fuel costs as coal would now be an auctioned resource. With linkages expiring by 2018, costs are to increase further," said Rakesh Arora, head of research at Macquarie Capital Securities Ltd.

Costs are already on the rise. In the September quarter, Hindalco reported a 30% rise in its power and fuel costs, while for Vedanta Ltd, fuel costs rose 6%.

“India’s cost of production will be higher driven by the fuel costs against manufacturers in Russia, Middle East and China, which enjoy a fuel cost advantage," Arora added.

Manufacturers in Russia, Middle East and China benefit from hydropower, oil resources and state incentives, respectively. In contrast, things have changed for Indian manufacturers, who have so far managed to keep costs low, thanks to cheaper fuel and captive supplies of bauxite, the primary raw material for aluminium.

Vedanta Ltd, India’s second-largest aluminium producer, sources 35% fuel through its own coalmine linkages—50% through e-auctions and the rest through imports.

“Our linkages expire in August 2016," said Vedanta in an email reponse on 7 November. Once the coal linkage expires, the company will need to source 50% of its fuel requirement through e-auction linkages, 20% through coal blocks and the remaining through imports.

“To be competitive in the global market, the industry requires regulatory support from the government, towards curbing subsidised imports and exploring the potential of bauxite reserves to provide bauxite linkage, which is crucial to the aluminium producers," Vedanta said in its email response.

A spokesperson for Hindalco, India’s largest aluminium producer, declined to comment.

“The cost of production (for aluminium) in India is going to go up—that is very evident. This will make it (Indian aluminium) expensive in the global market as fuel consists almost 50% of the production cost and will make them uncompetitive," said a metals analyst with a domestic brokerage firm who did not wish to be quoted.

The analyst, however, added that this may not be true for all aluminium producers in India.

“In case of Nalco (National Aluminium Co.), if they are able to restart mining at some of their mines, it will be a different ball game as their coal cost will go down," he said.

Queries emailed to Nalco on Friday remained unanswered.

E. Lee Bray, a commodity specialist with US Geological Survey’s Mineral Resources Program said that power costs will be the main determinant of competitiveness.

“...power costs are a larger share of the total cost of production, so power costs are more likely to be a factor in determining which smelters are able to compete in an environment with low aluminium prices," he said.

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