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Future of Vedanta in the face of high debt, low metal price and raw material crisis

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The metals and mining conglomerate Vedanta Resources is going through multiple operational setbacks which have put the London listed heavyweight into a tough situation.

Firstly, it is the dwindling commodity prices which are forcing aluminium producers around the world to cut capacity and close down plants.  Revenue of the Vedanta group fell 16 percent to USD 3.02 billion in the 2nd quarter of 2015-16 from USD 3. 6 billion during the same quarter of last year.  Though it’s the volatile commodity market and the low metal price which are being blamed for the 2nd quarter results, there are many more factors in the loop that are to be considered.

Tom Albanese, Chief Executive Officer, Vedanta Limited, said: “We are continuing to drive efficiency improvements and optimise opex and capex across the business, taking measured steps to reduce net debt and maximise free cash flow. While the near-term market outlook is challenging, we believe we have the right mix of low cost assets fuelled with new technologies to benefit from future demand in India and globally.”

Cheap Chinese Import & Capacity Closure

Vedanta Resources has taken up aggressive job cut and capacity closure strategies to withstand this critical condition. About 3000 job cuts have already taken place at the mining giant’s aluminium wings Vedanta Aluminium and Balco.

Balco started the procedure to shut down its Korba aluminium rolling mill in September which was expected to see a 1000 job loss. The “steep fall” in the metal prices besides dumping from China and falling margins were held accountable for the closure. The company also called it a restructuring exercise in the face of adverse situations.

In words of Balco CEO Ramesh Nair, “The closure of the rolling mill is in the backdrop of a crash in global aluminium prices and the prohibitive cost of coal to run our power plants…Worldwide, there has been a fall in energy cost but for Balco, the absence of linkage coal and regulatory issue for starting our coal mines is making operations economically unviable.”

Low Metal Price and High Input Cost

Aluminium prices in the global market have fallen sharply from more than $2,200 a ton at the beginning of 2015 to $ 1,480 $ in the current month, making exports completely unprofitable.

Strangely, though aluminium prices have been plunging heavily since the beginning of 2015 power costs are constantly rising in India. The price of coal which is the main energy source for Indian producers is going up like never before, at more than INR 4000 a ton (about USD 60) in the domestic auction market.  Low selling price for the metal and high input costs are making production almost unviable for the Indian companies.

“To operate at peak capacity, BALCO requires 30,000 tons of coal. While the coal auctions have benefited the company in terms of allocation, the new block will meet only 10 per cent of the peak capacity,” Mr. Nair added. Vedanta Ltd holds 51 per cent stake in BALCO the government holding the remaining stake.


Raw Material Uncertainty

Vedanta’s Lanjigarh refinery in Odisha is working at a quarter of its actual production capacity. Towards the end of August Vedanta announced that they had initiated “the process of gradual closure” due to non-availability of bauxite from Odisha and the downturn in global aluminium prices. “…with the current market turmoil, which is not likely to improve soon, and in the absence of access to bauxite from within the state, the plant is operating with a daily loss of INR three crore. Hence, we are forced to initiate the process of gradual closure,” said K K Dave, Chief Operating Officer, Vedanta.

Vedanta has been running the refinery depending on imported bauxite and bauxite sourced from other states. Bauxite sourced from other states costs more than three times of the captive mined bauxite (INR 3,500 per ton vs 900 per ton). Similarly, imported bauxite is about INR 5,000 per ton. This huge input cost has made survival almost impossible for the Lanjigarh refinery which has incurred a cumulative loss of INR 4299 core till date.

Though Odisha Mining Corporation (OMC) agreed to supply of 150 million tons of bauxite to Vedanta, it has so far remained a promise in papers. Vedanta has been urging the government for bauxite proposing 100% value addition in the state itself. However, no solution is at sight in the near term and a huge investment is at stake.

The refinery’s closure is expected to impact directly/indirectly 10,000 people in the region. The refinery’s closure is bound to affect Vedanta’s smelter operations at Jharsuguda. Although Vedanta has not declared any timeline for the refinery’s closure and is negotiating with Odisha government for bauxite, the situation around does not seem to be positive.

Stock Market Downturn

It is not only the low commodity prices and higher input prices that are crippling Vedanta Resources, but it’s the cash crunch and debt that the company is trying to cope up with. In June, Vedanta announced the merger of Vedanta Ltd and cash-rich Cairn India and it is now supposed to be closed by June 2016. The objective was to get access to Cairn’s funds so that it can repay its heavy debt loads. While the deal has been approved by the two stock exchanges, it is now awaiting a nod from the High Court before it goes for a shareholder vote. The minority shareholders LIC and Cairn Energy PLC were not particularly happy with one equity share offer in Vedanta as a result of the merger. They did not consider it to be a fair valuation.

Vedanta Resources had USD 7.7 billion debt as on March 31, 2015 while its Indian arm Vedanta Ltd had another USD 4.57 billion debt. Whereas Cairn India, on the other hand, has USD 2.85 billion cash reserve.

Vedanta Ltd.’s stock price is falling much faster than Cairn’s. Already unhappy Cairn shareholders may not vote in favour of it in time which may put Vedanta Ltd in a tough situation all over again. During the second week of November, Vedanta was the worst performer on the 30-share index and ended the day 4.2 per cent down. On November 16, 2015, Vedanta closed at INR 90.55, up INR 3.30, or 3.78 percent. On the other hand, Cairns India closed at INR 132.30, up1.60 or 1.22%. On a year-to-date basis, share price of Vedanta and Cairn India declined 62 per cent and 56 per cent.

What Lies Ahead?

Despite all the obstacles and depressing market situation Vedanta chairman Anil Agarwal is still pinning hopes on the current government for policy reforms to attract investment. His group is lining up sizable amount of investments in India. Vedanta has not closed Lanjigarh refinery despite the mounting losses and urging Government to come up with faster solutions to the raw material fiasco in the larger interest of the families dependent on the plant and region’s development.

Vedanta has cut costs by as much as 25% throughout this market turmoil. Mr. Agarwal confirmed that the company will “tighten” capital spending and “do whatever is necessary” as far as innovation is concerned, to survive this condition profitably. Vedanta is aiming at improving their core skill and technical expertise. “Disruptive technologies need to be understood and learnt,” said Rajesh Padmanabhan, Vedanta’s group chief human resource officer. The company leadership sees the solution in innovation rather than trying to improve things in parts. The company also hopes to settle the environmental and social issues related to its mining operations.

A number of times Mr. Agarwal has reiterated the need of developing `semis’ under Make in India rather than exporting aluminium since value added applications would encourage hundreds of industries and employment. However, unless the raw material security is assured in a market situation where metal price is at rock bottom, input costs are high and cheap imports are flooding the market, indigenous aluminium industry cannot grow in India. India’s “rich reserve of bauxite” would just remain an entity in research papers unless government finds a solution to the mining woes and speed up the policy reform processes.


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