Falling commodity prices: will Vedanta rejig its business?

DEBABRATA DAS RICHA MISHRA New Delhi | Updated on January 22, 2018

Tom Albanese, CEO, Vedanta Resources Plc

Efforts on to cut operating costs to maintain financial strength: CEO Tom Albanese

The current global commodities cycle may compel Vedanta Ltd to re-look its business strategy, as it is probably the worst hit among the domestic companies.

“We are in a business where our products do not become obsolete,” Tom Albanese, CEO of Vedanta Resources Plc had told BusinessLine. But, today nearly all major commodities (mineral) are running at multi-year low levels. Vedanta is into five-six minerals — iron ore, aluminium, copper, zinc, lead, and silver.

Due to its size and scale of operations Vedanta was hit more. Its share saw a drop by about 25 per cent in the last month alone. Vedanta Ltd’s market capitalisation has gone down to ₹28,120.12 crore from ₹37,621.96 crore in a month.

The situation can be worse if the China’s official manufacturing purchasing managers’ index released on Tuesday is an indicator of how things will pan out in the coming months.

China being the biggest consumer and supplier of key metals and commodities dictates global prices. Its manufacturing PMI fell to 49.7 in August against 50 in the previous month. This triggered a further fall in commodity prices which have already been under pressure.

In his letter to the shareholders in Vedanta Ltd’s annual report for 2014-15, Albanese has acknowledged that volatility of global commodity prices has dampened the financial results, particularly lower oil prices, and this has slowed down the pace of ‘deleveraging programme’.

All metal prices in the Shanghai Metals Market closed in the red, apart from zinc.

Aluminium prices hovered at near six-year lows of 11,800 RMB/tonne. 

The London Metal Exchange (LME) Aluminium prices were already trading at around $1,548 a tonne on Friday's close.

Albanese in his letter said, “recognising the current commodity environment, we are implementing a series of initiatives to reduce capital and operating costs across all our business, to maintain financial strength and a strong balance sheet.”

For example, Balco, a group company, is worst hit because its cost of production is much higher due to old plant, machinery and labour costs, analysts say.

While Balco has closed down rolling mill having 46,000 tonnes capacity, it may further close down some units in the coming days unless government support is provided.

Vedanta’s Lanjigarh alumina refinery's one stream is also heading for closure in the next 10 days, cutting down production by 50 per cent.

Iron ore, another key business for Vedanta, is not in a happy position. While restarting operations, Albanese had said that $45 a tonne prices for the mineral globally will be viable for the company’s operations in Goa. However, with a pile up of the mineral in China, prices are expected to slump further than $45 a tonne. 

Analysts say Vedanta needs to focus on reducing cost of production to tide over the current environment.

“They are focussing on reducing costs, but the main problem they face is that a bulk of their cash is stuck in Cairn India and Hindustan Zinc. They are better placed in oil and zinc as their cost of production is extremely low compared to aluminium and power. If they are pushed against the wall, they can probably sell some stake in the profitable businesses,” said Rakesh Arora, Head of Research at Macquarie Capital Securities.

Another Mumbai-based broker said, “The fall in their cost of production of zinc is much more than the fall in net realisations. In the short-term, they can chose to focus on this to tide over the volatility in other segments.”

Published on September 01, 2015

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