Success in an uneven playing field

Stacks of aluminium ingots at the Nalco plant in Angul. - ASHOKE CHAKRABORTY

ALUMINIUM production is characterised by high entry barriers. The first stage in the manufacturing process involves the production of alumina, by refining bauxite ore; the second involves processing alumina in a smelter to extract aluminium. The costs of establishing new capacities are high. The availability of good quality bauxite at a reasonable price is the most important factor in determining the competitiveness of a unit. Electrical power is a key input in aluminium smelters and its cost is a key variable.

The high cost of setting up an integrated plant, the limited access to technologies and the long gestation periods of projects imply that the industry has a tendency to be oligopolistic in nature. This tendency has gained momentum in the last few years. First, Hindalco, the market leader in terms of profitability and market share in terms of value of output, took over Indian Aluminium Company Ltd (Indal). Sterlite, a relatively new entrant to the industry, also made acquisitions. It first took over Madras Aluminium Company, which had a relatively small market share and then, in 2001, it took over Balco, the third biggest aluminium producer in India, under controversial circumstances, after a bitter battle waged by the company workers.

Nalco's biggest strength is the quality of its bauxite ore. (Orissa has some of the best reserves of bauxite in the world; about 70 per cent of all bauxite reserves in India are in the State.) The alumina content in its ore, at 45 per cent, is regarded as very high; the silica content, low at 2 to 4 per cent, makes its ore among the best. With these advantages, the company is the least-cost producer of alumina in the world. While Nalco's cost of producing alumina is about $100 a tonne, the next best-competitive price, of a global major, is $140 per tonne. With the smelter situated close to the pithead of the coalfields near Angul, Nalco's transportation costs are low.

Although the company commands a share of 40 per cent of the aluminium output in India, its market share (in value terms) is only about 23 per cent. Hindalco, which has a production share of about 46 per cent, has a market share of over 42 per cent. This is the result of the way the public sector has been "reined in" by government controls and red tape, and most significantly, the manipulations of the private companies.

At the height of the struggle against Balco privatisation, several top officials of the company complained to this correspondent about the manner in which its plans for modernisation and expansion were held in abeyance by successive Union governments. This was despite the fact that Balco never sought any funds from the government for these projects. They also said that the company's production schedules were often determined by bureaucratic connivance with a leading private competitor. Much the same seems to have happened in the case of Nalco.

There is a kernel of truth in Minister for Disinvestment Arun Shourie's contention that Nalco's profitability rests on its access to low-cost bauxite and that the company has not developed its capability for value-addition.

However, the story does not end there. Although the company submitted its proposal to expand and modernise its capacity to the Union Ministry of Mines in 1991, it could go ahead with the projects costing about Rs.4,000 crores only in 1998. Meanwhile, Hindalco expanded its capacity and developed its downstream capability further. Despite several attempts by the management, the company has not been allowed by its parent Ministry to expand downstream value-addition capabilities. For instance, the proposal to develop a wheel project, formulated in the 1990s, did not get the Ministry's approval. Meanwhile, other private companies entrenched themselves in the market.

Shourie has pointed out that Nalco's profitability has been lower in 2001-02 coming down to Rs.409 crores from Rs.656 crores. Top Nalco officials told Frontline that the lower profits were the result of depressed aluminium prices, higher prices of raw materials and a wage settlement with employees.

A significant factor that affected profitability was the large investments the company had to make to take over a private company, Indian Aluminium Products Ltd (IAPL), which belonged to the Mukand Group. A senior Nalco official said the decision was not based on sound commercial grounds and involved substantial depletion of resources. He said "political pressure" played an important role in the takeover.

A comparison of the performances of Nalco and Hindalco reveals that though the latter is a more profitable company, Nalco is not an "inefficient" company, as Shourie has maintained. For instance, Nalco's return on capital employed is far better than Hindalco's. If Nalco's "weakness" in terms of downstream value-addition capability is discounted, then it is clear that the company has done well what it has been allowed to do. A senior Nalco officer told Frontline that "Nalco has not been allowed to come in the way of its private competitors" by developing downstream products such as aluminium sheets, foils and other extruded products. This, he said, would not have been a difficult task; nor would it entail substantial capital costs or investments in technology. He also pointed out that takeover of IAPL (now called the Rolled Products Unit of Nalco) would enable the company to make inroads into markets for downstream products.

Informed sources in Nalco said that Hindalco was desperate to gain control of Nalco with its bauxite resources and modern plants. The Aditya Birla group has asserted its intention to stay focussed in the field of industrial intermediate commodities.

The ongoing controversy over the attempt of Grasim, part of the Aditya Birla group, to gain control of Larsen and Toubro (L&T), is seen by industry sources as part of the group's efforts to entrench itself in these businesses by building overwhelming market shares.

Reliable reports also indicate that Hindalco and, to a lesser extent, Sterlite are the prime contenders for acquiring the strategic stake in Nalco. There are also indications that the foreign bidders for Nalco may only be interested in the company's alumina manufacturing facilities and not in manufacturing aluminium. In that case too the field may be left open for free play of monopolies.