Unit conversion costs, which consist of costs of smelting and refining, have reduced significantly to 1.8 cents per lb in 2007-08, compared to 6.1 cents per lb last year. Higher energy prices and fixed cost have been offset by better byproduct realisation and substantial operational recoveries. The sharp reduction in unit cost of production reflects our relentless focus on this area. We have taken up various TQM programmes which should result to further improvements in process and technical efficiency.
Given our growing output of byproducts, especially sulphuric acid, and our skills in selling these at best possible prices, we hope to achieve a state where the revenue obtained from by-product sales will exceed the total cost of production – thus achieving negative unit cost of production in the coming years.
Treatment Charges and Refining Charges (TC/RC)
2007-08 witnessed a tightening in the global concentrate market, mainly due to cutback in production of the second largest mine in the world combined with increased refining capacities and aggressive buying of concentrates in China. Spot markets were extremely
firm. During fourth quarter of 2007-08, TC ruled at around US$ 20 per tonne of concentrate, and RC at 2 cents per lb of copper (i.e. around US$ 110 per tonne). This resulted in a reduction in TC/RC compared to 2006-07. Negotiations for the 2008 Annual Frame Contracts for concentrates have been completed and the benchmark
TC/RC has been established at 45/4.5 (i.e. US$ 45 per tonne of concentrate for TC and US cent 4.5 per lb of copper for RC) with various improvements in the side terms such as quotation period, payment terms and gold/silver refining charges. Sterlite has concluded all its annual negotiations around similar levels with substantial improvements on side terms. Even so, the concentrate market is expected to be in a state of deficit for next couple of years. This may result in further softening of the TC/RC terms for the Company in the near term.
The Company’s efforts towards market development in India have paid dividends. Our domestic sale has increased by 35% to 157,071 tonnes in 2007-08 compared to previous year, and we accounted for 29% of the market in India. We also exported 180,035 tonnes of copper cathodes and copper rods, to our key overseas markets – the Middle East, China, Japan, Philippines and Thailand. We continue to develop a sizeable customer base for the export of copper rods.
Revenues from our copper business rose by 8% to Rs. 12,658 crore in 2007- 08. However, despite major reductions in the cost of production, the combined effect of a 50% fall in TC/RCs, over 11% appreciation in the rupee against the US dollar and increasing fuel prices led to a 30% reduction in operating profits (EBIT) to Rs. 998 crore.