VEDANTA IS POSITIONED WELL WITH A DIVERSIFIED PORTFOLIO OF ASSETS SPREAD ACROSS MANY COMMODITY CLASSES.
The IMF’s latest World Economic Outlook (WEO) in April 2016, estimates global growth at a modest 3.2% in 2016, broadly in line with last year. The recovery is projected to strengthen in 2017 and beyond, driven by emerging markets and developing economies as conditions in distressed economies start to normalise.
Advanced economies are also expecting moderate growth for 2016, in line with 2015. These economies are expected to grow at 2.4% in 2016, then marginally higher in 2017. Euro Zone is likely to see modest growth at 1.5% this year and 1.6% next year. In Japan, both growth and inflation are weaker than expected, with growth turning slightly negative in 2017.
China, the world’s second largest economy, continued to be sluggish with the IMF predicting growth rates of 6.5% in 2016, at the lower end of the official target of China of 6.5-7.0%. This reflects the negative impact of a weakening property market and slower industrial activity as the country continued its transition to a consumption and servicesled economy, rather than one driven by manufacturing and exports.
Although the growth rate in emerging and developing economies slowed to around 4%, they still account for the majority of world growth in 2016. Lower oil prices should support growth in many oil-consuming countries as living standards continue to rise in Asia and Africa in particular.
According to the IMF WEO, India by contrast remains a bright spot with strong growth and rising real income.
The global uncertainty and volatility has significantly impacted the commodities market. On-going supply increases, high inventories, softening demand, particularly from the emerging and developing economies have resulted in commodities trading at historic lows vis-à-vis peaks seen in 2011. Even though supply side factors are more profound, demand softening too has played an important role.
Markets are, however, witnessing some gradual rebalancing. February and March 2016 have seen metals prices recording strong gains. This was largely driven by improved market sentiments, falling stocks, production cuts and few supply interruptions, among other factors.
China however would be key — its share of world metal consumption rose above 50% in 2015 and it accounted for majority of global growth over the last 15 years. Gradual recovery in China could see favourable terms for the commodities market.
Overall, in the medium term, markets are expected to tighten largely due to reduced investment in supply capacity, rising global demand and metal specific factors.
India’s growth story has shown remarkable resilience. Numerous policy measures coupled with the decline in oil prices have enabled India to become one of the fastest-growing large economies in the world.
During the year, India’s growth story has shown remarkable resilience. Numerous policy measures coupled with the decline in oil prices have enabled India to become one of the fastest-growing large economies in the world. India has registered a robust and steady pace of economic growth in FY 2015-16 just as it did in FY 2014-15. The IMF projects India’s growth at 7.5% for FY 2016-17.
To create investment and a business friendly environment, the Government of India (GoI) has initiated a series of policy reforms, which are likely to prove transformational for the Indian economy. Focus on simplification and rationalisation of regulation, together with policy measures could prove to be a gamechanger for the Indian economy.
Increased public investment in roads and railways will have significant multiplier effect. The infrastructure sector has been a priority area for the Government, attracting enhanced public investment. The National Investment and Infrastructure Fund (NIIF) has supported robust growth in this sector. This special emphasis on infrastructure is helping drive demand for aluminium, zinc, copper and iron ore.
Given that the Government is committed to sustain the reforms momentum, it is expected that private sector investment will revitalise and further boost India’s growth prospects.
As a large net importer of crude oil, reduction in India’s import bill, by around 55% as compared to FY 2013-14, has had a positive impact on the Indian economy and supported a positive fiscal outcome. The largest impact of the decline in crude oil prices over the last two years has been on inflation — a key economic variable.
During 2015, Brent crude oil price averaged US$ 52/bbl — its lowest level since 2005, driven by the advent and resilience of shale oil production, increased oil production by OPEC members and muted demand. Supply continued to grow faster than demand, resulting in OECD commercial stock levels reaching a record high.
The Indian oil & gas market is characterised by very high dependence on imports. Imports represent around 75% of oil consumption and 40% of demand for gas. Against this background, sustained low hydrocarbon prices have augured well for the Indian economy. The Government is aiming to reduce India’s import dependence by 10% by 2022 and as one of the largest crude oil producers in India, supplying 27% of domestic production, Vedanta is well positioned to support this objective of higher domestic production to reduce the energy import burden.
The Government’s recent policy reforms in the Indian Oil & Gas sector have been encouraging. For instance, a new exploration and licensing policy termed Hydrocarbon Exploration and Licensing Policy (HELP) was introduced. The policy is a fundamental step change in the Indian Oil & Gas sector and introduces a new contractual and fiscal model for the award of hydrocarbon acreages. This policy, coupled with the fact that India is under-explored, offers significant opportunities for the Oil & Gas players to create value through higher domestic production.
Looking ahead, significant oil price volatility is expected. According to the International Energy Agency, 2016 also could be a third successive year when supply will exceed demand by 1 mb/d. However, from its historic low in January 2016, oil prices rebounded to more than US$ 45/bbl.
The Zinc market in FY 2015-16 was characterised by mine closures and priceinduced output cuts, thus improving the overall fundamentals of the metal. With global consumption expected to grow at a steady rate of 2-3% per annum, meeting this demand will be a challenge with recent mine closures and production curtailment, and no new replacements coming up in the near future. Zinc treatment charges (TCs) have fallen from the 2015 benchmark of US$ 245/t to US$ 188/t in 2016, a 23% reduction. This is also symbolic of the pace at which the concentrate supply is depleting. The falling zinc inventory at the LME warehouses also point towards a tightening zinc market.
This follows a brief period of FY 2015-16, which was marked by a loss in investor confidence in the base metals complex & a general retreat in prices. The situation was compounded by tepid demand in Chinese economy and a strong dollar.
Although the overall pace of consumption in the Chinese economy has cooled off a bit, demand for zinc is growing, albeit at a slower pace. Other zinc consuming economies like the EU the the US are expected to post higher growth after a dismal performance in the previous year. India is also projected to tread an encouraging growth trajectory (7- 8%) in the near term. Consequently, global zinc demand should expand this year with growth set to accelerate from last year’s depressed levels.
India’s zinc consumption didn’t grow significantly this year as the domestic steel industry suffered mainly on cheap imports. However, the Government’s measures to curb imports by increasing duty and implementing a minimum import price (MIP) will help domestic producers increase production. The country’s consumption is expected to grow by 6-7% in FY 2016-17, which will benefit us in particular. We had a market share of 79% in FY 2015-16, this will be a positive benefit to Vedanta.
The Zinc market in FY 2015-16 was characterised by mine closures and price induced output cuts, thus improving the overall fundamentals of the metal.
The Indian Government’s focus on upgrading its crumbling infrastructure has provided the much needed impetus to overall economic activity. As per Wood Mackenzie Long Term Outlook published in Q1 2015-16 zinc demand is forecast to rebound, growing by an average annual rate of 7.0% per annum lifting consumption to 900 kt in 2020. The use of galvanised steel in Indian automobiles has started picking up, with less than 3% in a typical car to 7% currently, and is expected to increase to 20% by 2020. Solar energy is another avenue which may demand an additional 50-350t of galvanised steel/MW of installed capacity.
Lead fundamentals remained bullish with lead prices falling the least among all other base metals in FY 2015-16. Lead consumption is forecasted to grow at 2-3% per annum in the long run.
Given the likelihood that low lead prices will reduce the availability of scrap metal, diminishing the incentive to collect, both primary and secondary supply will tighten in the months ahead.
With pollution concerns aggravating in China, market share for electric is likely to get a boost thereby increasing demand for industrial batteries. India’s growing telecom industry and ongoing infrastructure development will also support industrial battery demand, as should an expanding Photovoltaic (PV) market.
The key to this is medium-term industrial sector growth is estimated at 5.8% per annum with sustained investment in the relevant sectors is the key to this growth. India has the second largest number of mobile subscribers in the world after China and is currently ranked sixth in global vehicle production, suggests strong demand will eventually lead to higher prices.
Global mine production of copper is estimated to have risen by 3.5% to 19.1 mt in 2015 while refined primary copper production is estimated to have totaled 18.9 mt, 1.8% higher than the previous year. The main contributor to growth in world refined production was China (up by 4%). World copper usage, however, is estimated to be around 22.8 mt, in line with the previous year. A stronger US dollar and slower-than-expected growth in China have weighed on copper prices in 2015 and at the start of 2016 with prices dropping to levels even below US$ 4,500.
In concentrates, annual benchmark settlements for the year 2016 are slightly lower, as compared with the previous year, mainly due to uncertainties surrounding mine projects as prices continued to fall. However, several new mine projects commenced full production in 2015 and further expected new mine production/ expansion in 2016 will support higher concentrate availability. Global smelter production increases during the same period are not expected to keep pace with the mine production. This will ensure that the custom concentrate market in 2016 remains well supplied leading to higher levels of TC/RCs.
Vedanta is one of the major exporters to China and also holds the highest market share in India where demand is expected to grow at more than 8% as the policy reforms and various other initiatives taken by the GoI rejuvenates the economy.
Vedanta holds the highest market share in the domestic copper market, where demand is expected to grow at more than 8%.
Global aluminium consumption rose by 4% to 56 mt in 2015, as compared with 2014. This growth was primarily driven by China where consumption was up 6.7% in contrast to consumption in the world outside of China, which grew by only 1.2% to 27.2 mt. As per CRU’s latest estimates primary aluminium global demand is expected to grow by 3% CAGR in the period 2015 – 2020, driven by transport sector and aluminium substitution for other heavier metals.
Supply has grown by 6% to 57.5 mt in 2015; however, production outside China was flat at 26 mt, due to production cuts. Worldwide, supply is outpacing the demand, which will continue to put further pressure on both pricing and premiums. Specifically, China’s consistently high production and exports to the rest of the world is adding to stocks globally.
Aluminium demand in India is likely to be strong in the coming years, driven by large infrastructure investment by the Government along with increased investment activity by the private sector.
In India, primary production for FY 2014-15 stood at 2.4 mt and FY 2015-16 will be close to 3.1 mt. Demand is likely to be higher than average at around 8% during 2014-2020, spurred by large infrastructure investment by the Government along with increased investment activity by the private sector. This includes investment in electrification driving demand for wire rods, the automotive sector driving demand for alloys and the ‘Make in India’ campaign driving more aluminium consumption generally.
FY 2015-16 witnessed a significant decline in prices on the back of rising supplies from Australia and Brazil, and slackening demand from China. Prices are projected to remain well below levels recorded during the height of the mining boom. A sustained period of lower prices over the medium term is expected to result in the closure of high-cost capacity as the financial losses of these companies begin to accumulate.
Although these closures will provide some support to prices, new low cost capacity is being developed, particularly in Australia and Brazil, that will constrain any large increases in prices.
While global iron ore demand is projected to remain relatively flat, continued substitution of domestically produced iron ore in China with seaborne iron ore is expected to result in a modest increase in international trade. Reflecting this, global iron ore trade is projected to increase by 1.3% a year between 2015 and 2021, to reach 1.6 bt.
Export growth is projected to come almost entirely from Australia and Brazil, with import growth projected to largely come from China and, to a lesser extent, the United States and Japan.
Vedanta’s iron ore business in Goa caters primarily to the global seaborne iron ore trade due to its logistical proximity to the port along with inland waterways. Goan low grade exports are primarily destined for Chinese Steel mills who are able to blend the low grades with other high grade expensive ores from Brazil and Australia. By contrast, the iron ore business in Karnataka caters primarily to the domestic steel industry in the state of Karnataka, which is located within a radius of 200 kilometres of the mine.
The Indian power sector has witnessed substantial growth in the past decade to meet the growing demand and as well the large latent demand. According to the World Bank, India has been responsible for 10% of global energy demand growth since 2000. The Indian Power system is the fifth largest in the world and India is one of the top five electricity consumers of the world. Growth in industrial activities, rapid urbanisation and rural electrification is expected to push the total installed capacity to 562 GW by 2030 as per the Niti Ayog report in April 2015.
To date demand has in fact, been suppressed due to the financially stretched position of the distribution companies, who have been unable to purchase sufficient power to meet consumer demand and are managing the situation through power cuts.
Radical transformation measures have been introduced by the Government including. The ongoing financial relief and transformation package Ujwal Discom Assurance Yojana (‘UDAY’) for the distribution companies announced by the Government is expected to enhance the financial health of the distribution companies, and encourage higher consumer demand on the grid.
Continued focus on efficient generation, coupled with such macro factors are expected to yield better returns in the medium to long term. Transmission constraints in the grid have also dampened the development of the power market in India in the past. This is expected to improve in FY 2016-17, alongside the commissioning of new transmission projects.
Vedanta faces a more positive environment locally in the medium term as India continues its strong growth and implements the Government vision to reduce dependence on imports.
With almost all installed capacity coming on stream in FY 2015-16 and improvements in the supply of local coal, Vedanta’s generation capacity has increased by around 30% for the coming year.
With more than 9,000 MW of installed capacity spread across India including one of the largest Wind installations (273 MW), Vedanta is poised to continue playing a vital role in the power story for transforming the nation.
Vedanta is positioned well with a diversified
portfolio of assets spread across many
commodity classes, enabling it to adjust
to economic cycles and offset market
downturns. With its focus on India and
position as a
low-cost producer, Vedanta
faces a more positive environment locally
in the medium term, as India continues
its strong growth and implements the
Government vision to reduce dependence
on imports. In the
long–term, Vedanta’s diversified spread across commodities makes it well positioned to benefit as supply and demand fundamentals gradually get aligned globally.