Annual report and accounts
FY 2015

Market overview

Emerging markets continue to be key drivers of growth. 7.2% India’s economic growth in 2014.

Aluminium demand in India is growing strongly, spurred by large infrastructure investments. Government programmes such as Make in India and electricity and housing for all, will drive increasing demand from the electricity sector.

Prices in US$ per tonne unless otherwise indicated FY2015 FY2014 % Change
Copper 6,558 7,103 (7.7)
Aluminium 1,890 1,773 6.6
Zinc 2,177 1,909 14.0
Lead 2,021 2,092 (3.4)
Silver (TOz) 18 21 (14.3)
Iron Ore (63 Fe Grade) 70 115 (39.1)
Crude per bbl 85 108 (21.3)

Global gross domestic product (GDP) increased by 2.6% in 2014, according to World Bank Global Prospect Report 2015. There was a notable divergence in performance, however, between the world’s major economies. The US started off weakly but the economy recovered through the spring and summer. The Chinese economy had a stronger start and slowed in the second half of the year, and growth dipped slightly below the government’s 7.5% target. Europe’s growth remained weak in 2014, and The European Central Bank announced significant easing measures in the summer. Activity remained fragile in emerging economies.

According to the World Bank Global Prospects Report 2015, global growth is expected to rise moderately, to 3% in 2015 and average about 3.3% through 2017. High income countries are likely to see growth of 2.2% in 2015–17, up from 1.8% in 2014, on the back of gradually recovering labour markets, ebbing fiscal consolidation, and still-low financing costs. In developing countries, as the domestic headwinds that held back growth in 2014 ease and the recovery in high-income countries slowly strengthens, growth is projected to gradually accelerate, rising from 4.4% in 2015 and 5.4% in 2017. Lower oil prices will contribute to diverging prospects for oil exporting and importing countries, particularly in 2015.

As the world economy faces subdued conditions and uncertainties, the Indian economy is poised to accelerate. Growth is expected to rebound given political certainty, positive policy measures, low commodity prices and improved business confidence.

Internally, the decisive outcome of the national elections buoyed sentiment and boosted expectations of major economic reforms. The Government has already initiated reforms including diesel price deregulation, natural gas price reforms, steps towards more flexible labour markets and reforms in the coal, mining and telecommunication sector. In addition, the launch of the ‘Make in India’ campaign has further boosted sentiment.

The focus on infrastructure investment, aided by a focus on certain industries with significant impact on the overall economic growth, will drive demand for aluminium, zinc, copper and iron ore.

As a large net importer of crude oil, the decline in crude prices has a positive impact in India. Going forward, this could improve growth prospects and ease inflation pressures increasing disposable incomes for consumers, lower input costs for energy-intensive sectors and lower current account deficit amongst others.

The IMF Survey in March 2015 estimates that real GDP growth will rise to 7.2% in 2014–2015, and continue at that level in 2015–2016, as a result of the revival in industrial and investment activity.

The Indian Government is now focused on improving the business climate and reviving manufacturing growth, with the target of improving India’s ranking in the World Bank’s Ease of Doing Business survey. Initiation of economic reforms and renewed optimism, together with low crude oil prices, augurs well for the Indian economy.

  1. 1 IMF World Economic Outlook Database, April 2015
  2. 2 Includes secondary and value added consumption from all sources.

The global demand for zinc increased by 4.3% in 2014 to 13,881kt. Refined zinc production growth declined from 3.9% to 3.3% in 2014, highlighting the widening gap between the global zinc demand and its supply. Combined with reductions in LME stocks, this resulted in moderate price rises during the year. Global zinc consumption is expected to grow steadily by around 4%–5% in the coming years and the closure of some large mines such as Century and Lisheen, will create further shortage in supply. New mines and upcoming projects such as Vedanta’s Gamsberg project will help offset the gap to an extent.

The outlook for demand in India remains positive with CAGR of around 6%, driven by a strong galvanising sector which accounts for 75% of demand. With a 78% share of the Indian market and a high quality rating for its LME registered brands, HZL is well positioned to take advantage of these positive developments.

During 2014, global lead demand increased to 11,621kt, a growth of 3.7%, while primary refined lead production growth was 4.9%. Chinese demand which accounted for about 45% of global lead demand in 2014, grew by 4.5% in 2014 compared to 6.6% in 2013.

In 2015, we expect a continued increase in demand, led by the Chinese expansion in automotive output and construction of mobile phone base stations, requiring lead-acid batteries for back-up power. Amid falling fuel prices and interest rates, as well as Government promotion for foreign investments, India is expected to be among the world’s top four auto-producers, leading to a substantial increase in lead consumption in the country.

World copper consumption is estimated to have totalled 22.6mt in 2014, 8% higher than 2013, despite slowing economic growth in key emerging economies. China remained the main driver of world copper consumption in 2014 accounting for 46% of the world’s refined copper consumption.

The availability of copper concentrates increased during the year following the resumption of Indonesian exports and new mines such as Caserones and Sierra Gorda starting production and TC/RCs improved considerably over the year.

World refined production is forecast to increase by 4.8% to 23.5mt in 2015, with moderating growth rates in China thereafter leading to growth in demand softening to 3.9%. 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 6%–8%. With its LME registered copper, Vedanta is well positioned to meet increasing demand for refined copper in India’s critical electrical sector.

Global aluminium consumption rose by 7.6% to 54mt in 2014, primarily driven by China, which leads in supply as well as demand. World-wide aluminium supply is outpacing demand, with subsequent pressure on pricing and premiums. In 2014 LME aluminium cash prices remained almost flat at US$1,866 but high LME stocks and lead time for delivery led to higher metal premiums.

Looking forward, primary aluminium demand is forecast to grow by 5% per annum up to 2020, driven by the transport sector and substitutions in favour of aluminium, but the release of LME inventories and consistently high production in China will keep prices soft over the coming year.

Aluminium demand from India is growing strongly, spurred by large infrastructure investments. Government programmes such as ‘Make in India’ and ‘electricity and housing for all’ will drive increased demand from the electrical power, transport and construction industries. There are new opportunities for the downstream industry in India to develop value added products, including alloys for defence and automobile applications. Vedanta’s portfolio is focused more on the value added products and demand for its rods, billets and rolled products is likely to increase substantially.

The global iron ore trade is estimated to have increased 9% in 2014 to 1.3 billion tonnes supported by increases in supply from Australia and Brazil. Record iron ore production in 2014, combined with weak demand fundamentals in China, put pressure on prices which dropped by 47% during the calendar year.

This reflected the market shift into oversupply with high stocks building in Chinese ports in addition to resilient domestic production. For 2015, lacklustre Chinese steel consumption growth is likely to dampen prices and the major miners are turning their focus to cutting production costs and increasing productivity.

In India demand for steel is forecast to rise as the Indian Ministry of Steel plans to increase steel production to 300mt by 2025 and investment in new capacity is under way leading to a projected growth rate in demand for steel of 5.3%. As Vedanta iron ore mines come back into production, it will help service the projected demand growth.

Following three years of relative stability and averaging around US$100 per barrel, oil prices have fallen sharply since mid 2014, a result of supply side pressure. New supply sources, notably from North America, have added to this imbalance. For 2014, oil demand grew by just 0.7% vis-à-vis 2013 when it grew at 1.4%. However, 2015 is forecasted to see growth of 1.2%.

The Indian oil & gas market is characterised by very high dependence on oil & gas imports, importing over 75% of its domestic requirements. Petroleum imports constitute more than 35% of India’s total gross imports, leading the Government of India to drive for increased domestic production to reduce the energy import burden of the country by at least 10% per annum, until 2022. As one of the largest crude oil producers in India, Vedanta is well-positioned to support this vision.

Vedanta is positioned well with a diversified spread across many commodity classes, enabling it to adjust to economic cycles and offset market downturns. The Government of India’s vision of higher domestic production to reduce India’s dependence on imports and the ‘Make in India’ programme are expected to accelerate demand in the Indian metal market, creating a positive environment for Vedanta in its domestic market in the near term and globally in the medium term.