Market Review

Realising opportunities for growth


India is now projected to grow by 7.4% in 2018 and 7.8% in 2019, maintaining its status as one of the fastest-growing major economies in the world 

Global economy and commodity markets

The global economy strengthened in 2017, registering a 3.8% growth according to the International Monetary Fund’s (IMF’s) World Economic Outlook (WEO). This was a 0.5% increase over the previous year and the fastest growth rate since 2011. This global uptick was driven by resilient growth in advanced economies combined with a continued pick-up in growth in emerging markets. Key drivers included an increase in investment spend, supported by an improved outlook and a rise in private consumption.

China’s economy grew at 6.9% in 2017, defying expectations of a slowdown, due to strong global demand and sustained state infrastructure spending. While the IMF expects a softening in growth in 2018, China will continue to play a key role in global metals markets given that it accounts for more than 50% of world metal consumption.

Commodity prices strengthened in 2017 and this continued into the first quarter of 2018. Both demand and supply factors supported the broad-based price increases. The acceleration in global growth led to an increase in demand for commodities, while supply rationalisation due to Chinese production cuts supported stronger commodity prices. Key risks to commodities in the short-term include enactment of additional tariffs, production cuts and sanctions.

Opportunities for Vedanta

Global growth

Global growth is expected to strengthen to 3.9 % in both 2018 and 2019, a 0.2% upgrade for both years compared to the IMF’s October 2017 forecast. While growth prospects for advanced economies are likely to remain somewhat subdued going forward, growth in emerging markets and developing economies is expected to continue to increase, from 4.8% in 2017 to 4.9% in 2018 and 5.1% in 2019.

This global growth will lead to higher demand for metals and oil. Vedanta’s diversified portfolio and attractive basket of commodities positions us well to take advantage of this projected uplift.

Tight mine supply

Market balance for certain commodities, in particular zinc and copper, is expected to remain tight due to limited investments in new projects, mine closures and higher than expected levels of demand.

Vedanta is well-positioned to take advantage of these supply and demand factors, given the ramp-ups across businesses and the various growth projects underway.

Indian economy

India is a key market for Vedanta and one that we believe has huge growth potential. According to the IMF’s WEO of April 2018, the Indian economy grew at 6.7% in 2017, accelerating from a relatively slower growth in the first half of the year due to the transitory effects of the currency exchange initiative.

A number of major reforms were undertaken in 2017. On July 1, 2017, India launched its biggest tax reform, the Goods and Services Tax (GST). The implementation of the GST will help reduce internal barriers to trade and increase efficiency and tax compliance. The GST eliminates cascading of taxes and encourages ‘Make in India’, thus driving growth momentum. In a separate reform, major stressed assets were marked for resolution under the Insolvency and Bankruptcy Code 2016, to ensure a time-bound insolvency resolution, helping corporates clean balance sheets and reduce debt.

These policy measures have improved external confidence in the Indian economy and are set to provide a boost to economic growth. More importantly, they have enabled India to jump 30 places in the World Bank’s Ease of Doing Business rankings and resulted in the first upgrade in its sovereign debt ratings for 14 years – to ‘Baa2’ from ‘Baa3’.

An India-focused growth agenda

India is now projected to grow by 7.4% in 2018 and 7.8% in 2019, maintaining its status as one of the fastest-growing major economies in the world, according to the IMF’s WEO. In the medium-term, growth is expected to rise gradually as structural reforms continue to be implemented, raising productivity and incentivising private investment. An amended MMDRA (Mines and Mineral Development and Regulation Act) in 2015 has brought increased clarity on the licencing around mining. Key regulatory reforms around opening commercial coal mining to the private sector and the launch of Open Acreage Licensing (OAL) in the Oil & Gas sector to improve exploration are some of steps in the past year towards creating a more favourable mining environment.

Positive demographic factors such as an increasing workforce and urbanisation are driving a greater need for infrastructure development. The Indian Government continues to invest in the infrastructure sector, having increased its spending in the Union Budget 2018-19. In September 2017, the Government launched ‘Saubhagya’, a new scheme to ensure electrification of all remaining willing households in the country. In October 2017, the Government launched ‘Bharatmala’, a new programme to optimise efficiency of road traffic by bridging critical infrastructure gaps. Initiatives like these would be a major driver for economic growth.

Looking ahead, we expect to see a continued focus and further investments in the infrastructure, transportation and power sectors. We also anticipate changes in Government policy to incentivise domestic metal and energy production and to reduce dependence on imports. These initiatives will lead to an increasing demand for domestically produced metals.

Vedanta, as the only diversified natural resources company in India, is uniquely positioned to leverage India’s growth potential by catering to that demand. With such a vast domestic market, everything we produce in India, we aim to sell in India.

ZINC

Zinc

Supply-side will hold the key

Zinc was the leading performer on London Metal Exchange (LME)last year, with prices up 38%. The year was marked by a sharp decline in finished goods stocks, which fell to record lows that were the equivalent of around six days of global consumption in 2017. This reduced zinc supply from China for most of the year. The combination of scheduled mine closures, strategic production cuts and the impact of environmental inspections in China depleted global stocks of zinc concentrate. The consequent constraints on refined production ensured that the rally in zinc prices that started in 2016 was sustained in 2017.

Mine supply is expected to increase in 2018 as projects, including the Century Tailings project, Glencore’s Lady Loretta, MMG’s Dugald river and Vedanta’s Gamsberg mines, are expected to add approximately 400-500 kt of refined zinc this year, totalling about 13.7 million tonnes. However, Zinc market fundamentals remain robust with global zinc consumption expected to grow by 2.5% to 14.8 million tonnes in 2018. This implies that the concentrate market will remain tight and refined metal stocks could further reduce significantly.

Products and customers

Vedanta is the largest zinc producer in India, with a 78% market share. Approximately 68-75% of the refined zinc produced is sold in the Indian market, primarily to steel companies, with the rest being exported to countries in Asia and the Middle East. Over 70% of Indian zinc consumption is used for galvanising steel, predominantly in the construction and infrastructure sectors. We also produce zinc for use in die-casting alloys, brass and oxides and chemicals. Vedanta’s Zinc International operations comprise Namzinc Pty Ltd in Namibia, which is the largest integrated zinc producer in Africa, as well as Black Mountain Mining (BMM) in South Africa. Namzinc produces refined zinc, which is sold within Africa and exported to Europe and China, while concentrate from BMM is exported to traders and refiners internationally.

Market drivers and opportunities

Last year saw a healthy increase in zinc consumption in the three major consuming regions – Asia, Europe and North America. Demand growth in China from the real estate and automotive sectors, and the ‘One Belt One Road’ initiatives, was partly offset by the impact of pollution control measures.

Europe recorded a surprising revival in growth in industrial activity in Germany and France, driven by an uptick in domestic consumption along with a major push for technology and engineering product exports. With falling unemployment, rising Fed rates and changing trade policies in the US, we are already witnessing higher consumption, along with fresh investments targeted at promoting exports.

In India, zinc consumption in the near-term will benefit from the ongoing restructuring of the steel industry and adherence to newly established IS277 coating standards. The alloys and die casting sector also witnessed robust growth, led by zinc-magnesium alloys. Demand from the automotive sector remains robust due to the rising penetration of galvanised steel in domestic cars.

Over the next five years, zinc demand in India will be a beneficiary of higher construction spending, which is expected to increase at around 10% CAGR with projects under the metro rail, Smart Cities Mission and Swachh Bharat (Clean India) driving investments in urban infrastructure

African zinc consumption is also significantly driven by the galvanising industry, with end-use in the mining and construction sectors, and this represents a key market for us.

Production ramp-up at Zinc India and the Gamsberg project this year will enable us to benefit from the rising demand globally, particularly in India and Africa.

SILVER

Silver

Industrial uses driving demand

In 2017, global economic growth and positive industrial sentiments underpinned the strong demand for industrial silver in solar panels, electrical components, brazing and alloys and other applications. Supply of silver remained constrained in 2017 as silver production is primarily a by-product of copper, zinc and lead extraction processes, which were impacted by subdued mine supply in the year. The silver market, therefore, continued to be in deficit for the fifth year in a row.

Positive economic development is an argument in favour of silver because it means that industrial demand is likely to become even more dynamic – it accounts for more than half of total silver demand. India’s silver imports doubled y-o-y, while China’s rebounded strongly, primarily driven by rising industrial demand for the metal, which is expected to pick up at an even better pace this year in Asia.

Products and customers

Hindustan Zinc holds the position of being India’s only primary silver producer – 558 tonnes in the last financial year – and ranks 10th globally in terms of the top silver-producing companies. A major proportion of the Indian market’s appetite is satisfied through imports, with the balance coming from secondary manufacturers and recyclers. With the latest accreditation of ‘London Good Delivered Bars’ in April 2018, HZL’s silver is on par with international standards. In India, the highest usage of silver is in jewellery (38%), followed by coins & bars (22%), silverware (20%) and industrial fabrication (20%), according to the World Silver Institute. We cater to markets including the industrial sector (electrical contacts, solder and alloys and pharmaceuticals), and the jewellery and silverware manufacturing segment.

Market drivers and opportunities

Silver investment demand, along with gold, is likely to face headwinds from higher interest rates, but rising inflationary expectations as well as any geopolitical tensions may see investors’ interest in silver recover as the metal is considered to be a safe-haven asset. Industrial demand for silver will be driven by a strong solar PV sector and increased vehicle electronics applications, while jewellery demand is expected to grow with rising income levels in Asia.

Zinc India produced a record level of silver in the past year. Vedanta is well positioned to capture the growth in demand as production rises significantly in the coming years with the ramp-up of the silver-rich Sindesar Khurd mine.

OIL & GAS

Oil & Gas

Boosting Indian oil & gas production will drive future growth

Robust global demand and curtailed production by members of the Organisation of the Petroleum Exporting Countries (OPEC) supported crude oil price increases in 2017, outweighing relatively high US crude oil production. As a result, crude oil prices ended 2017 at US$65/bbl, the highest level since 2015.

Both OPEC and non-OPEC countries have agreed to continue limiting output until the end of 2018. With the US pulling out of the Iran nuclear pact and triggering renewed sanctions on a key oil-producing country, oil prices reached levels above US$75/bbl in May 2018.

Products and customers

Vedanta’s operations produce crude oil, which is sold to hydrocarbon refineries, and natural gas, which is used primarily by the fertiliser industry and power generation sector in India.

Market drivers and opportunities

US crude oil production continues to rise: the US Energy Information Administration (EIA) projects average US crude oil production of 10.7 million b/d in 2018 and 11.4 million b/d in 2019, surpassing the previous record of 9.6 million b/d set in 1970. Resilient US production will have an impact on oil prices going forward.

In India, 83% of oil consumption and 45% of gas consumption is met by imports. However, the Indian Government recognises the need to boost domestic production to achieve greater energy security. To this end, they are targeting a 10% reduction in India’s imports of oil and gas by 2022 and have introduced a number of new policies aimed at attracting investment and boosting production.

In 2017, we saw the launch of OALP in the Indian Oil & Gas sector, giving companies the option to carve out their own exploration blocks without a formal bid round from the Government, and providing the opportunity for acreage acquisition for the first time in eight years. This process will help fast-track exploration and production in India.

India is under-explored, with only seven of the 26 sedimentary basins currently producing oil and gas. Further, reassessment of India’s resource base has highlighted an increase in India’s total hydrocarbon resources (in place) by close to 50%, providing significant growth opportunities.

Vedanta, a strong believer in India’s resource potential, has recently bid for all 55 blocks on offer in the first round of oil and gas auctions under the OALP.

As the largest private sector producer of crude oil in India, and with a strong track record and growth pipeline in exploration and development, Vedanta is well positioned to benefit from the Government’s desire to boost domestic production and to leverage India’s oil and gas resource potential.

IRON-ORE

Iron ore

Growing steel consumption driving iron ore demand

Iron ore prices averaged US$72/dmt in 2017, a rise of over 21% y-o-y, due to high steel margins and robust demand in China. Given high margins and low inventories, there is likely to be a growth in steel production and iron ore demand in the near-term, as the winter production restrictions are lifted.

The iron ore price is, however, expected to experience volatility in 2018, due to uncertainty regarding the lifting of winter production restrictions in China (which have been slow untill now), the increase in low-cost supply from Australia and Brazil and lower y-o-y demand growth from China. China’s steel production is sensitive to a range of economic, monetary and environmental policies, which could impact market dynamics and future iron ore prices.

Products and customers

Vedanta was India’s largest private sector exporter of iron ore in FY2018. Iron ore is a key ingredient in steel production, which ultimately serves the construction, infrastructure and automotive sectors. In 2017, approximately 53% of Vedanta’s production, from Karnataka and Goa, was sold domestically to Indian steel producers and 47%, comprising low-grade ore from Goa, was exported, primarily to Chinese steel mills.

Market drivers and opportunities

The pace of global steel production is forecast to slow in 2018 and 2019, as the supply cuts resulting from stringent environmental regulations in China outweigh a pick-up in growth elsewhere in the world.

In the short-term, globally, steel demand is projected to grow by 1.6%4 by 2019, while Indian steel demand is projected to grow by 6.6% to reach 115 million tonnes in 2019, driven by investment in infrastructure and construction. India is one of the lowest per capita steel consumers globally and produces only c. 10% of China’s steel production. However, India is on track to become the second-largest steel-producing country over the next two years, surpassing Japan. The ongoing restructuring and consolidation of the steel industry in India is expected to further support the demand-growth going forward. However, mining at Vedanta’s Goa operations has ceased, effective from March 16, 2018, pursuant to the Supreme Court order dated February 7, 2018. We continue to engage with the Government to provide clarity around restarting of mining operations at Goa. Until such time, our ability to capitalise on the global demand remains muted.

This growth in Indian steel production represents an opportunity for us to grow our domestic iron ore sales. Vedanta’s permitted mining capacity at Karnataka has been recently enhanced to 4.5 million tonnes (from 2.29 million tonnes previously).

ALUMINIUM

Aluminium

Construction and transportation segments continue to drive demand

Aluminium demand, excluding China, grew by 4% y-o-y in 2017, while Chinese demand grew by 6% supported by the strong economic growth across most of the world economies.

The year 2017 turned out to be good for aluminium prices as a late-year rally lifted prices by 33%, up US$558/t from January levels and the second largest annual price increase this century. Aluminium LME prices rose by 21% compared to FY2017 owing to increases in raw material prices, expectations around supply reform in China and the implementation of trade tariffs in the US.

Products and customers

Vedanta has the largest integrated smelter in India, with 2.3 mtpa proposed capacity, and is the market leader in primary aluminium with 40% market share. Our product range includes ingots, primary foundry alloys, wire rods, billets and rolled products.

In FY2018, 40% of our sales were to the Indian market, specifically for use in the construction, electrical and transportation industries where Government policies aimed at providing affordable housing were a significant driver of demand growth. International sales to our established customer base in other key Asian, European and American markets grew by 64% to c. 1 million tonnes, compared to FY2017.

Market drivers and opportunities

Globally, aluminium demand is forecast to increase by 4% next year, driven mainly by ongoing demand in the construction and transportation segments. The advent of electric vehicles will further start to provide a new demand stream. In India, initiatives to increase investment and develop infrastructure continue to drive demand. India is also one of the world’s largest electrical applications market for aluminium and the electrification programmes driven by the Government will drive the growth in aluminium consumption by 7% next year. The next wave of light weighting in the Indian railways combined with the ‘Make in India’ campaign will herald new growth opportunities for new investments in the aluminium downstream. Uncertainty from trade wars and geo political events, including sanctions on Russia, have the potential to impact the aluminium and alumina markets globally.

Vedanta continues to ramp up its Jharsuguda smelter and grow its production in order to take advantage of these opportunities. Vedanta’s wire rod facility, which is one of the largest globally, is positioned to leverage the aluminium demand from electrification trends.

POWER

Power

Growth in Indian demand is driving capacity increases

Vedanta operates a 9 GW diversified power portfolio in India consisting of 96% thermal power and 4% from renewable energy sources.

India has the fifth largest power generation capacity in the world. Between FY2010- FY2017, electricity production grew at a CAGR of 7.03%, driven by Government initiatives and schemes to increase electrification across rural India. A target to connect 18,452 villages to the power grid was achieved in April 2018.

Products and customers

Of Vedanta’s power portfolio, 40% is used for commercial power while 60% is for captive use. Nearly 92% of the power generated for commercial purposes is backed by long-term power purchase agreements with local Indian distribution companies.

Market drivers and opportunities

Demand for power in India is expected to grow rapidly from 1160.1 TWh in 2016 to 1894.7 TWh by FY2022, mainly driven by the expansion in industrial activity, a growing population and increasing electricity penetration. The Government has also been supportive of growth in the power sector, de-licencing the electrical machinery industry and allowing 100% foreign direct investment. In addition, in February 2018, the Government permitted commercial mining for thermal coal, which will improve India’s self-sufficiency and reduce coal and logistics costs.

As of February 2018, India had a total installed capacity of 334 GW, of which thermal constituted 220 GW, nuclear 7 GW, hydro 45 GW and renewables 63 GW. Total captive power installed capacity stood at 41 GW.

India currently has a power deficit and is targeting an additional total of 100 GW under the Indian Government’s 13th Five Year Plan (FY2017-FY2022). The target for renewable energy has also been increased to 17 5GW by 2022. Vedanta’s power portfolio is well positioned to capitalise on India’s growing demand for power.

COPPER

Copper

Consumption in India and China is fuelling demand

Refined copper consumption grew by 2.0% in 2017, while demand in China, the largest consumer of copper, grew by 3.2%. Copper prices firmed up on the prospects of the US’s infrastructure plans and increased demand in China for appliances and consumer goods. In India, the refined copper market experienced some volatility during the year but is expected to continue growing on par with growth in the Indian economy.

On the supply side, after five consecutive years of growth, 2017 did not see any significant changes in supply. However, disruptions to production at Escondida, Cerro Verde and Grasberg, and further environmental cutbacks at smaller Chinese mines, led to 995 kt of identified supply disruptions in 2017.

Products and customers

Refined copper is predominantly used in manufacturing cables, transformers and motors as well as castings and alloy-based products.

Vedanta, with its 400 ktpa custom smelter in Southern India, is the market leader in India with a market share for refined copper of approximately 33%. Copper India’s exports accounted for 49% of overall sales in FY2018 and were mainly to China and South East Asia.

Market drivers and opportunities

We expect to see continued demand growth in India and China in the coming years, driven by population growth, urbanisation, the rise of the middle class and support from Government measures and initiatives. Additionally, demand for copper products feeding the electronics and automotive industries will support solid growth in the short to medium-term in Japan, South Korea and Taiwan.

There is the potential for further industrial action at Latin American mines during 2018 as labour contracts are negotiated at Chilean and Peruvian copper mines, possibly leading to a fall in production.

Our smelter capacity expansion projects in Tuticorin will enable us to take advantage of these opportunities and respond to the increased demand.

3 Platts daily, Refers to 62% Fe fines China CFR
4 2% Fe fines China CFR Quarterly