Market Review

A dynamic environment

positioned for long-term growth

GLOBAL ECONOMY AND COMMODITY MARKETS

The global economy in 2019 faced twin headwinds of geopolitical uncertainty and sluggish growth in advanced economies and emerging markets. If we take a broad perspective, economic performance remained weak across most major economies such as the Group of 7 (G-7) and BRICS nations (Brazil, Russia, India, China and South Africa) due to a confluence of several factors, including the US and China trade tensions, Brexit and the fear of deglobalisation. The year saw tepid consumer and investor confidence and weak manufacturing and trade scenario. This significantly undercut commodity demand, thereby negatively impacting prices.

On the other hand, the start of year 2020 showed signs of recovery following the Phase I trade pact between the US and China, diminished fears of a nodeal Brexit and reduced geopolitical tensions. The effect of global central banks pursuing an accommodative monetary policy also helped partially revive the overall market sentiment.

However, these early signs of stabilisation were severely impacted by the risk posed by the ongoing global pandemic, COVID-19. The human cost of the pandemic is already immeasurable and all countries across the world are working hard in solidarity to protect people and limit the economic impact felt around the world. According to government sources, the US economy alone lost 20.5 million jobs in April. The number of just one month dwarfs the 8.6 million jobs that were lost over the entire stretch of 2008 and 2009 during the financial crisis. The US economy shrank by 4.8% at an annualised rate in April, the worst decline since the fourth quarter of 2008. The British and French economies also contracted in January 2021 compared to the previous three months.

The International Monetary Fund (IMF) has pegged global growth in 2019 at 2.9%. For 2020, however, the IMF projects a negative outlook, with a -3% de-growth in the overall global output. In one of the remarkable moves the US oil futures fell to below zero for “WTI Crude oil” for the first time in history. For the very near term the pace of the economic recovery is expected to be sluggish. Nevertheless, once the economies recover, global growth is expected to revive partially and register y-o-y growth of 5.8% in 2021. The recovery is expected in two stages - an initial phase of social distancing and containment, and the next planned phase of revival and stability.

Globally there is an encouraging and concerted action to battle the COVID-19 pandemic. Broad-based monetary policy and government expenditure are expected to shore up economic activity in most countries and countries like India have already announced immediate economic relief and support to various strata of the population.

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OPPORTUNITIES FOR VEDANTA - GLOBAL

Globally, the concerted actions of monetary and fiscal policy measures have been observed by individual countries as well as international financial institutions to help the global economy combat the slowdown. These ongoing measures are likely to provide support to improve demand for commodities. There are early signs that industrial activities in China are recovering with the Manufacturing Purchasing Managers Index (PMI) for March 2020 jumping to 52%, up from a record low of 35.7% in February 2020. Against this backdrop it is expected that global commodity prices will slowly recover, particularly across metal prices, something that Vedanta is well positioned to benefit from.

Growing urbanisation and ongoing investment in infrastructure will support the use of galvanised steel, especially in emerging economies such as China and India. In addition, China’s stringent environmental norms and efforts to improve industrial utilisation are likely to deter new capacity additions. This supportive demand-supply dynamic for zinc is likely to augur well for Vedanta, one of the world’s largest zinc producers. At Vedanta, we remain on track to become the world’s largest integrated zinc-led silver producer in two years, while maintaining our cost leadership.

Recent developments in the sourcing of alumina have provided us with a cost advantage in the aluminium business. We have been able to reduce our costs considerably with the structural changes and enhanced backward integration. There is also significant development in our energy business. We have emerged as a successful bidder for the Jamkhani coal block in Odisha. This, along with our Chotia mine, will strengthen our coal security for the aluminium business.

Thus, our diversified commodity portfolio and relentless emphasis on costs and digital implementation positions us well to take advantage of the expected demand upswing, and the resulting improvement in commodity prices.

OPPORTUNITIES FOR VEDANTA - GLOBAL

INDIAN ECONOMY

India is Vedanta’s primary market and we believe in its immense potential, as the fundamentals for growth remain intact. 2019 has been particularly challenging for the Indian economy with a slowing growth rate, declining exports, rising inflation and a downturn in manufacturing output. However, the Government of India and the Reserve Bank of India (RBI) have announced a slew of policy decisions, aimed at bolstering market sentiment and reviving growth.

These include the biggest corporate tax cut in 28 years to encourage private investment. The successive interest rate cuts by the RBI are important steps in the right direction. The impacts of these measures will be gradually visible, after normalcy returns in the economy, and the benefits of lower rates stimulate economic growth.

Reforms in the Insolvency and bankruptcy Code (IBC) including the enforcement of a stringent timeline for the insolvency resolution process have forced a behavioural change, leading to resolution of more cases. The Government of India has also embarked on an ambitious divestment programme, more than doubling its current target by focusing on strategic sales.

The Government of India has also announced a plethora of reforms aimed at pushing growth and investment in our specific areas of operation. The cornerstone of investment spending will come from the ₹102 trillion National Infrastructure pipeline (NIP), which aims to ease bottlenecks and stimulate the economy. It includes projects under implementation in various government schemes such as Housing for All (PMAY), Smart Cities, Dedicated Freight Corridors, Sagarmala, Bharatmala, and Jal Jeevan Mission, apart from participation from the private sector.

This is also expected to be beneficial for related sectors such as steel, base metals, cement, power transmission and distribution. The expansion of the national gas grid announced in the Union Budget 2020 and expected reforms to facilitate transparent price discovery are set to significantly enhance the domestic gas market. While India had started to witness progress in the economy by Q4FY20, the COVID-19 situation dramatically brought production and the economic activity in the country to a standstill. Prioritising the health of its people, the Union Government announced consecutive lockdowns to maintain social distancing and arrest the spread of the pandemic.

Considering the effects of COVID-19, India’s growth is expected to slow to 1.9% in FY2020. While this affects the nation’s overall growth momentum in the short-run, India is relatively better placed than most of its counterparts and will be one of fastest recovering economies once the cycle inflects. In FY2021, India can expect a recovery and is expected to grow by 7.4% (Source: IMF, World Economic Outlook April 2020). Active government spending and revival of large-scale consumer demand are expected to maintain India’s resilience.

OPPORTUNITIES FOR VEDANTA - INDIA

India-focused Growth Agenda

Despite challenges in the global economy, India continues to outshine major economies of the world in terms of accomplishing decent growth that is sustainable and inclusive. The country’s economic growth is supported by a sound fiscal policy framework, strong regulatory mechanism, wide-ranging structural reforms undertaken by the Government of India and states and a robust democratic ecosystem that continues to underline the importance of transparency in corporate governance. Rapid adoption of technology, growing confidence of global investors in the performance of the Indian economy and a young, aspiring and productive population further helped spur growth prospects. In 2019, India became the world’s fifth largest economy, ahead of France and the UK in terms of nominal GDP. The road ahead continues to be attractive for India, despite macro headwinds.

Going forward, we expect to see emphasis on infrastructure development on account of a burgeoning workforce and wide-ranging urbanisation. The government’s vision entails over ₹100 trillion expenditure on infrastructure, coupled with concrete steps towards decarbonisation and promotion of electric mobility. These initiatives will strengthen the country’s demand for commodities, given that India’s per capita consumption of all metals including steel, aluminium, copper and zinc is much below the world average. India is the third-largest oil consumer in the world, but in per capita terms, it is only about onethird of the world’s average. Given its rising energy needs and increased dependence on crude oil imports, this also offers an opportunity for domestic oil producers.

Policy Support

The Indian Government has announced various progressive policy measures in its Union Budget 2020 as part of its efforts to kickstart investment. These include the abolition of Dividend Distribution Tax (DDT) and the recently announced tax dispute settlement scheme – ‘Vivad Se Vishwas’, which is expected to boost the ease of doing business in India. Other measures such as lowering the effective corporate tax rate, reduction in cost of capital and simplification of regulatory and tax framework for foreign investment funds have also aided in this effort.

As part of its policy push to develop the metals, mining and oil sectors, the Government of India has drafted a framework policy for a variety of key supporting areas. These include the policy for steel clusters to resolve challenges of the ancillary, downstream and value-added steel units and unlock their growth potential.

It has also constituted a working group on the proposed new industrial policy, aimed at promoting emerging sectors, reducing regulatory hurdles and making India a robust manufacturing hub. The Government is also revamping its Foreign Trade Policy (FTP) for FY 2020-25, which could be a game changer for the Indian economy by promoting exports and making Indian goods more globally competitive. A National Logistics Policy is also being proposed to drive business competitiveness through an integrated, seamless, efficient, reliable, green, sustainable and cost-effective logistics network. The proposed policy aims to reduce overall logistics cost to less than 10% of India’s GDP.

The government has allowed 100% Foreign Direct Investment (FDI) in coal mining and associated infrastructure, doing away with end-use restrictions for coal blocks – setting up the stage for commercial coal mining to take up in India in a big way. This clearly indicates that the government wants to bring competition, efficiency and transparency to the sector. The recent round of auctions in Odisha for iron o re and manganese mines is a testament to this reality. Other measures undertaken in mining include the setting up of a committee by the Ministry of Mines to revise royalty rates and dead rent on minerals. This is expected to substantially increase mining output and invigorate the sector. In the meanwhile, the Ministry of Environment, Forests & Climate Change (MoEFCC) is also working on streamlining environmental clearance processes to increase the ease of doing business.

Apart from the Open Acreage Licensing Programme (OALP) adopted earlier, India has further liberalised its oil & gas sector in 2019 by opening up its fuel retail sector to non-oil companies, a move that will intensify competition, with private and global oil majors seeking to expand their presence here. The country has also embarked on major reforms, aimed at expanding city gas distribution (CGD) networks, to raise the share of gas in the energy basket from the current 6% to 15% by 2023.

In order to provide support to the industries in the face of COVID-19, the government and the central bank have rolled out a slew of measures to infuse liquidity in the economy. The reduced the repo rate has been cut by 75 basis points to 4.4%, reverse repo rate by 90 basis points to 4.0%, and Cash Reserve Ratio (CRR) by 100 basis points to 3.0% (as on 27 March 2020). The RBI also permitted all commercial banks to allow a moratorium of three months on payment of instalments of all term loans outstanding as on 1 March 2020. The Reverse Repo rate was further reduced by 25 basis points to 3.75% on 17 April 2020.

To aid the economically disadvantaged sections of society, ₹1.70 Lakh Crore relief package has been announced by the Union Government under the Pradhan Mantri Garib Kalyan Yojana. The major focus areas of the relief package includes:

Increase in the MNREGA wage to ₹202 per day from the earlier ₹182 to benefit 13.62 crore families
₹2,000 paid to farmers in the first week of April under the existing PM Kisan Yojana to benefit 8.7 crore farmers
5 kg wheat or rice and 1 kg of preferred pulses distributed freeof- cost every month for the next three months to 80 crore people
The Government of India has also allowed state governments to utilise District Mineral Foundation (DMF) fund created out of the contribution from sale of minerals to combat the COVID-19 pandemic

As exports feel the impact of the pandemic, the Indian Government has extended the validity of Foreign Trade Policy 2015-20 to 31st March 2021. In order to boost exports and make Indian exports cost competitive, India is in the process of introducing a scheme for Remission of Duties and Taxes on Exported Products (RoDTEP). It will create a mechanism to reimburse various taxes/duties/levies, at the central, state and local levels, which are incurred during manufacturing and distribution of exported products, (applicable to those which are currently not being refunded under any other mechanism).

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