In Conversation: Cost competitiveness is the key
Oct 07 2016
Tom Albanese talks on the volatile global commodity prices, Vedanta Resources' investment plans and moves to further strengthen its presence in the country
How difficult is it to run a metals and commodity business, where prices are volatile?
Cost competitiveness and efficiency is the key. Vedanta has been able to manage well during this economic downturn, especially due to weaker commodity prices. The focus has to be on continuous cash generation and repayment of debt. We have to be competitive in terms of prices, with an obsession to keep costs low, so that we can run our business and survive during the worst swings in the market. We urge our business leaders everyday to focus on safety, issues like productivity and good efficiency, and being competitive in cost. I think this would apply to everyone.
We are in a business that is vulnerable to low prices and, thus, it should to be able to survive the ups and downs. It also means that when we talk about new capital projects, they themselves have to be very competitive businesses that can survive low prices on their own. Because, we might start a new project and have a fair idea about the revenues it would generate during 1-4 years. We can predict that. However, if there is going to be a 50 per cent price change in the first year, we can’t predict the prices for the four years. It means that new projects have to be very competitive in the market in order to survive.
But when we talk about volatility, it is not about low prices alone?
Yes, prices that can be both low and high. When prices rise rapidly, that can also cause disruption. When governments see higher prices, they will ask for higher royalties and higher taxes. Thus, when the prices dip, we are saddled with heavier burden.
Hence, we have to recognise that when prices go too high, that will be equally bad. Also, in this price-rise situation, you may see new producers and new mines getting into production, which could make our business tough in the next cycle.
Vedanta has a fair presence in the Indian market. What will be the focus areas for the group in the near to medium term?
Our focus, first and foremost, is on commodities – metals and energy, which we believe will be needed in the future in India. More people will use power and more people will use the products we produce. Obviously, for some of our businesses, we need to have infrastructure such as power. We will focus on our core business, which is energy and metals — the key parts of the building blocks for the future Indian economy.
Can you elaborate on individual segments?
In terms of individual businesses, we are keen on investing more in Tamil Nadu: we have been in the state for about 20 years now. Sterlite Copper is one of the cost-efficient smelters in the world. We have invested in identification and promotion of sustainable applications for the waste produced at the plant. Copper is seeing softer prices, and we hope to see some recovery in near future, supported by demand growth, especially in India. The country is witnessing 10–12 per cent growth in demand, which is almost three times the annual global demand in terms of growth. Global copper mines are also maturing, which will also create room for some improved price in the future.
The process of merging Cairn and Vedanta is underway and the merger is expected to be completed by end of the ongoing financial year. Cairn India is currently producing two lakh barrels per day and we expect some reduction in production next year, after which, we believe, we will be able to improve on that production front. We are working closely with our partner ONGC for the same.
Zinc has been the best-performing metal in our lot and the market is very strong. Old mines are closing and not much capacity was built over a period of time. In fact, mining industry had largely neglected zinc in the past 20 years or so. The metal has big potential in terms of a growing market of galvanising and coating, especially for automobiles, where corrosion resistance is becoming important. We will be increasing the capacity of Hindustan Zinc to around 1.2 million tonne per annum (tpa) from the present 9.5 lakh tpa in the next three years. To achieve this target, as well as for the development of an underground mine, we will spend around $250 million.
Aluminium also has tremendous potential for growth, as demand increases from industries such as automobiles, which seek to replace steel with comparatively lighter aluminium. With power cost one key factor, besides availability of bauxite, in this sector, China has the global edge as it subsidises power to aluminium smelters and other downstream units due to high job potential of the sector.
If 15 per cent of the annual Indian steel consumption comes from China, in the case of aluminium, about 45 per cent of requirement is met through imports. India has abundant bauxite resources, but due to social issues, we are not able to exploit it to its full potential. While power sector has also improved off late due to sufficient availability of coal, which can help in generating cheaper power.
Vedanta has invested around $8 billion in the aluminium sector over the last ten years with the majority of the capacity still under-utilised. We intend to grow from nine lakh tpa now to 2.3 million tpa in the next two years.
You are participating in the Global Sustainability Summit and yet urging the need to have cheaper power through coal, which is an area of growing concern for environment degradation?
Carbon is a global problem. India ratifying the COP21 protocol earlier this week is a huge step taken by the country in recognising the need to find a lasting solution to the emission problem. India is today the world’s third largest emitter of carbon and its carbon emission is expected to grow quite substantially as its requirement for electricity grows. That being said, coal is now and will continue to be, for at least the next 20-30 years, a key part of India’s energy map. I think, even with the large amount of investments in renewables, you need coal for generating power.
For our kind of businesses, particularly alumina, we need power 24X7. We can’t afford to hope for a sunny day or be in a situation where there is power only during the day and not in the night. There is a need for innovation and better technology, especially in coal-burning carbon emission for power generation. And certainly, from my side, we will extend our co-operation in supporting research on carbon capture sequestration, something that will allow coal to be burnt to generate power in a more environment-friendly way. Carbon is a 50–100 year problem and India should take its first steps on that. But, we also need to recognise that the US and Europe had 200 years of industrial revolution and used coal, before switching to other options. India is not in that stage yet.