Why is the government silent on the big copper crisis?

Is there a genuine reason for India to shy away from the war of resource nationalism? The question is gaining grounds in Delhi where the government is routinely asked about its stand, or it’s peculiar silence, on copper. 

What exactly is the crisis?

Goldman Sachs International has estimated that the prices will touch $10,000 a tonne by 2022, reported Bloomberg last December. The prices of refined copper could be in the range of $6,500-6,800 per tonne in FY2021 as compared to $5,923 in FY2020, 

India, a major exporter of refined copper till a few years ago, is now a net importer. And it has been happening for almost three years at a stretch, right after one of the world’s largest copper plants in Tamil Nadu’s Thoothukudi operated by Vedanata was shut due to environmental concerns. In 2017-18, India was among the top five exporters of copper cathodes. Copper is as important as aluminium and steel because of its widespread use in sectors such as construction, telecommunications, transportation, consumer durables, and automobiles.

The plant was operated by Sterlite Copper, Vedanta’s subsidiary. It had a production capacity of 4 lakh tonnes. It was closed in May 2018 by the Tamil Nadu government after the state’s pollution control board demanded a shutdown following violent protests by locals living close to the plant that the plant posed a health hazard to those living close by.

Independent investigations done by journalists have proved otherwise. Only a handful of locals had breathing problems, a probe by a television channel revealed in 2018. The probe also found effluents released from the plant not impacting the sea waters as claimed by the locals, who were backed by a host of NGOs. 

So what has been the outcome of the plant shutdown? There has been a huge, huge fall in India’s copper exports which has helped next door Pakistan. Islamabad, expectedly, has increased its exports to China. In short, it is a very bad signal for New Delhi and its copper economy.

(Representative photo)

Exasperated domestic copper manufacturers, it is reliably learnt, have petitioned the Ministry of Mines, seeking government’s immediate intervention to check the huge surge in copper prices in the country. In routine meetings with the bureaucrats, officials of these companies have highlighted how copper prices are now controlled by Chinese smelters, which have gained a solid grip on global supplies of copper concentrate and stocking up the metal.

The officials, it is reliably learnt, highlighted a host of things, the most crucial point being how important copper is for the nation. Copper is badly required for electric vehicles — India aspires to be a global manufacturing hub of electric vehicles — for superior battery efficiency. For the records, an electric vehicle uses 400 per cent more copper than a fossil fuel-run vehicle.

It is not immediately known how the ministry reacted. Till date, the government has not issued any notification relating to copper.

“Domestic copper industry has been operating at almost half of its capacity since the last two financial years due to closure of Vedanta’s 400 thousand tonnes copper smelter at Tuticorin,” said Care Ratings in an 18 February report. It added that India will continue to be a net importer of copper in FY21, pending the resumption of Vedanta’s copper smelting facility.

Copper is crucial for wiring, cable, transformers and power generation. In solar power alone, 5.5 tonnes of copper is needed per MW, for cabling, wiring and setting up heat exchangers. India’s electricity network will be due for upgradation because of rising electricity demand. And if India does not have enough copper, infrastructural developments will take a back seat. 

How serious is the crisis for India? As per data available, nearly 43 percent of global copper production was consumed by China in 2019-20. A report by Care Ratings — issued in February 2021 — raised an interesting point. It says the following: “Chinese monopoly over copper is two pronged: firstly locking in long-term supply agreements to ensure its copper needs are met adequately, and secondly by leveraging high import levels to dictate the price at which copper is sourced globally.”

As a result, copper prices are shooting up in anticipation of increased demands, touching  its highest point in nine years. 

The comparison between India and China is all but obvious. Boosted by the rally of copper prices, most of Chinese mines kept high operating rates last year. Some of the mines, which had even suspended production for environmental, safety, or financing issues, recently resumed production. 

In contrast, Indian copper manufacturers continue to grapple with increased dumping and low quality output saturating the market. India, for the first time in almost two decades has become a net importer of copper, New Delhi is importing more copper than export. 

What is a very worrying factor is that the London Metal Exchange copper prices touched a nine year high in January 2021 to average $7,961 per tonne. The on-going concentrate supply issues and strong demand, particularly from China, is expected to keep copper prices elevated over the next quarter before the supply issues get resolved in 2021.

The recent Budget deepened the crisis by lowering tariffs on copper scrap, thereby allowing low quality copper to flood the market. New Delhi’s copper imports have touched an all-time high of ₹14,000 crore.

This is one side of the coin.

It stems from the burgeoning impact of Indo-Japan free trade agreement (FTA) on the domestic copper industry. Japanese copper manufacturers enjoy very low rates of interest due to the “Zero Interest Rate Policy” implemented by Tokyo. But Indian companies face some of the highest interest rates in comparison to other countries. 

Now, due to the high value intrinsic in copper, interest costs for Indian smelters comprise a significant portion of their total cost and adversely impact the domestic industry’s overall competitiveness. Removal of tariff barriers under the current Indo-Japan CEPA (signed way back in 2011) have also opened a floodgate of imports which Indian industries are unable to compete with.

The current customs duty on refined copper products from Japan is 0.5 percent, significantly lower than that of the domestic industry’s basic raw material, i.e. copper concentrate, which attracts an import duty of 2.5 percent.

So let’s put this in a focussed context: Japan currently allows its copper manufacturers to import copper concentrate at no import duty, and the Indo-Japan CEPA allows these companies to then export the refined copper to India at a minimal 0.5 percent duty. The amount paid them as tax is therefore negligible. Contrast this with the 2.5 percent duty levied simply on importing copper concentrate by Indian manufacturers, and the dichotomy becomes apparent. 

Now, this very inverted duty will progressively get worse when the duty under the treaty becomes zero by the year 2021. In 2019, the duty was levied at 0.9 percent, and has already come down to its current rate of 0.5 percent in 2020, and is heading towards 0 percent this April. There is a concessional custom duty on copper concentrate from Japan, but it is irrelevant as they do not produce the copper concentrate themselves and instead import it from other countries for refining. 

As a result, there is a huge imbalance which is dealing a crippling blow to the domestic custom smelters as well as the downstream industries dependent on their products. As a result, domestic customers of refined copper are finding it cheaper to import the material rather than purchase it from domestic manufacturers. Copper imports will continue to rise on account of the gradual reduction of the import duty. In short, it spells a foreboding future for the domestic copper industry at a time when ensuring ample access to this metal is critical for improving technology and making economic progress. 

But that is not happening and India could spend up to 30-35 percent more just to import the same level of refined copper it does today. And consequential effects on forex levels is going to be significant. 

If the plant in Tamil Nadu was operational and production doubled, planned expansion and doubling of production capacity by Sterlite Copper had gone ahead, New Delhi would have been in a position to collectively bargain for improved copper prices. Three years have lapsed without any solution in sight from either the Central or the Tamil Nadu government. Sterlite Copper had a 400,000MT of annual copper production that could meet India’s needs for the next decade. Why not push environment protection protocols and open the plant? 

India has all but given up control over copper, considered a powerful enabler metal. Everyone agrees that India needs to produce more copper.

Except, the government.

(The author was a part of a television crew which probed the alleged environment issues at the plant and conducted interviews with all the stakeholders. Everyone was on the record that the crisis at the plant was manageable and could have been easily rectified but blown out of proportion by a section of the protestors. Recently, demands are mounting on the Tamil Nadu government to open the plant. The matter is now in the Supreme Court.)

Shantanu Guha Ray
Shantanu Guha Ray
Shantanu Guha Ray is India Editor, Central European News (CEN), Vienna and the Consulting Editor, News Intervention. His much-acclaimed and award-winning book, Target, takes a close look at the NSEL crisis.

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