The Hindu Business Line : JSW Group bets big on aluminium foray

In the pipeline
Alumina plant project estimated to cost Rs 3,500 crore.
First of the 2 phases of 700,000 tonnes each likely to cost Rs 2,200 crore.
Expects to get allocated land in Visakhapatnam by April next year.

Mumbai , May 30

Its proposed foray into aluminium would cost the JSW Group nearly Rs 9,500 crore. Known for its presence in steel, JSW has based its diversification on an expected 50 per cent growth in global aluminium production by 2015 and bullish price for the metal on the London Metal Exchange (LME) at least for the next 3-4 years.

A new company, JSW Aluminium, has been floated to execute the project, mainly a 250,000-tonne metal smelter and a 1.4 million tonne-alumina plant. Smelting would be supported by a 600MW power plant, expertise for which could be had JSW Energy.

Funding plans

Of the project cost, an estimated Rs 3,500 crore would go towards the 1.4 million tonne-alumina plant, likely to be implemented in two phases of 700,000 tonnes each with first phase cost of Rs 2,200 crore. While funding details are some way off, anticipation is of a 70:30 debt equity ratio. "By April next year, we hope to be allotted the required land near Vishakhapatnam," Mr Sandeep Gokhale, Director (Business Development), JSW Steel, said last Friday. Onus of funding would be on the group and not the steel company.

Plant commissioning should be around April 2010.

Major players

Outlining the premise for the foray, he pointed out that by 2015 global production capacity in aluminium would increase from the current 30 million tonnes to 45 million tonnes. Of the approximately 30 million tonnes of alumina needed for this enhanced production, India's contribution should be 5-6 million tonnes. At present, the country produces a million tonnes of aluminium and three million tonnes of alumina, major players being NALCO, Hindalco and BALCO. Bauxite is largely mined in Orissa, Andhra Pradesh, Madhya Pradesh, Chattisgarh and Jharkhand (Gujarat exports bauxite but deposits in the western region are scattered). Indian bauxite is of high quality with coastal bauxite additionally possessing low ore burden; sometimes appearing as over-crop, having a thick ore bench and generally soft in nature.

MAIN REASON

The mines for JSW Aluminium, which would be managed by the Andhra Pradesh Mining Development Corporation (APMDC), fall in the coastal category. Railway infrastructure needed to move the raw materials is available.

While these be the resource driven factors for JSW eyeing aluminium, a major business reason is the almost four million tonnes of new smelting capacity coming up in West Asia. These custom smelters founded on the strength of locally available cheap and abundant power would require huge doses of alumina to feed their fires.

JSW intends to export alumina; something already betrayed in its planned production capacity for aluminium, which at 250,000 tonnes is modest compared with the 1.4 million tonnes of alumina capacity upstream. Raw material requirement in West Asia would help JSW tie-up a certain amount of its alumina for dedicated supply overseas, in turn hastening project break-even at Vishakhapatnam.

Given bullish times for the metal, it is not imperative that dedicated supply contracts should translate into equity participation. Mr Gokhale did not divulge the LME price level considered for break-even at JSW Aluminium but said the metal's price, currently around $2700 a tonne, should prevail in the region of $2400 for the next 3-4 years.

COMMODITY BIZ

While at the users' end aluminium has been competing with steel in select applications, he insisted that neither hedging through presence in competing metals nor likely benefit from a different type of commodity cycle drove JSW's interest in aluminium.

If there is a common thread between the group's steel business and the foray into aluminium, it is simply that both represent commodity businesses that require big capital outlays and function as large, continuous process industries, Mr Gokhale said.