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Business News/ Companies / Company-results/  Sesa Sterlite to cut capex substantially to offset slump in prices
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Sesa Sterlite to cut capex substantially to offset slump in prices

Sesa Sterlite CEO Tom Albanese on how the firm will cut down its capex programme substantially in the coming months, in line with global practices and increase its production of aluminium and zinc

Albanese says there will be a more balanced portfolio mix of oil and zinc and aluminium in the next fiscal year. Photo: BloombergPremium
Albanese says there will be a more balanced portfolio mix of oil and zinc and aluminium in the next fiscal year. Photo: Bloomberg

Mumbai: With major capital expenditure lined up across businesses, Sesa Sterlite Ltd, the holding company of listed entities Cairn India Ltd and Hindustan Zinc Ltd, did not foresee a slump in commodity prices, especially the price of crude oil, which halved the fiscal third-quarter profit of its oil business. While firmer zinc and aluminium prices and higher volumes helped cushioning overall profit, Sesa Sterlite says this will not be enough and will have to be complemented by a reduction in capital expenditure (capex).

In a telephone interview, Tom Albanese, group chief executive officer of Sesa Sterlite, said on Thursday that the company will cut down its capex programme substantially in the coming few months in line with global practices and increase its production of aluminium and zinc.

Edited excerpts:

In 2013-14, Cairn India contributed almost 52% to the total Vedanta Group’s Ebitda (earnings before interest, taxes, depreciation and amortization). However, with falling crude prices, do you see that share coming down substantially and the mix of aluminium and zinc, etc., increasing?

We are focusing on Sesa Sterlite and in this company a high level of total earnings is coming from our oil business. But this year, it will be lower due to lower oil prices. But that will be matched by a higher level of corporate performance both by zinc and by aluminium. We will see a more balanced portfolio mix of oil and zinc and aluminium over the course of next fiscal year.

Does it mean you are looking at improving the performance of your zinc and aluminium business to offset the impact of lower crude prices?

We are going to realistically expect that we have lower prices, particularly for iron ore and to a lesser extent for copper, which will affect the business in the near term. We are doing what we have been doing in the past quarter, which is continuing to focus on how we can manage our cost, increase our overall production, control capital spending, etc. We have been successful over the past several months in progressively ramping up our aluminium and zinc production and that has been quite important for mitigating some of the effects of lower oil and iron ore prices.

So they have had mitigating effects and putting us in a better position than if we would have been a pure oil company. That’s an important point as we think about how we are going forward recognizing that we have the ability to allocate capital to the businesses that are in the best positioned in those markets.By how much do you plan to increase your production to offset the impact of falling crude in 2015-16 as against 2014-15?

We haven’t yet given guidance, but we have received permission for the 12000 MW (CHK) plant at Balco, which we have built two years ago. It has been sitting idle and now we can get it up and running. This will help us in increasing our power generation, helping us in increasing our power sales and for increasing aluminium production. And I hope to be in a position to have that facility completely ramped up very soon. In aluminium, a year ago we were producing about 750,000 tonnes of aluminium. We are probably close to 850,000 tonnes of production of aluminium metal now. What we do expect to see is a substantial increase in our total aluminium production next year as compared to this year as a consequence of various approvals that we are currently working on at the state and federal level.

Will this require additional capital expenditure as well?

We have made investments worth over 2.2 million tonnes of aluminium metal, so we still have a long way to go for filling out the capacity that we have already built but have yet not been able to commission due to the various government approvals that are required.

In terms of capex, we have already provided guidance to the market. Our total capex spend previously guided was around $2 billion between oil and gas business, aluminium business, power, zinc and other businesses. But as a consequence of the slump in prices globally, particularly oil and iron ore prices, we are undertaking a very rigorous capital review and we would expect that there would be a considerable reduction in that capital expenditure from what has been previously guided to the market.

How much could the reduction be?

We hope to be in a position to provide market guidance over the next month or two. We have joint venture partners and shareholders and we have to involve all of them in this exercise. It is expected to be quite substantial, probably, cumulatively in the range of multiples of hundreds of millions of dollars.

How much of coal capacity would you like to bid for in the upcoming coal mine auctions that can meet your backward integration requirement?

What we have found over the past year, in particular, is that we have not been able to get the needed coal from existing domestic sources, especially Coal India Ltd, and we, like other industries and independent power producers, have been suffering from lack of coal capacity. So for me, the upcoming coal auction is quite important in bringing in the coal capacity in terms of bringing in domestic capacity to reduce our reliance on imported coal

Where do you see the downturn getting arrested in commodity prices?

What we have seen in the last few years is that new supply coming up is putting a dampener in commodity prices and therefore when there is a drop in supply, firmness comes. For example, in case of zinc, the single biggest zinc mine in the world is scheduled to close in Australia in later part of 2016 and that will not be replaced by anything. So we are going to see tightness in zinc in the coming year. In case of copper, we have seen massive reduction in capital expenditure in expansion of new copper mines and meanwhile the largest copper producer is finding it difficult to keep production up. Even in oil, every oil producer is reducing capital cost therefore we will see a reduction in rate of supply in the coming months. But even while economies are slowing down, the total demand for the products is just going up. Therefore, more the prices continue to stay at a low level and more projects you see are being cut, the more drastic the upward reaction in prices will be. And I expect this to happen in 2016.

Is capturing more markets where capacities are coming down your strategy behind increasing capacities?

What we are focusing at capturing are the markets where they are stronger. First we are already looking at replacing part of our closed zinc production business which closed this year. Our production growth in Indian and Africa will take care of this. Also, in India we are looking at increasing our aluminium production this year. But whatever aluminium we produce, it will largely be channelled into the export market as India’s aluminium demand is not growing as fast as we like to see it because a lot of subsidized scrap aluminium is flowing into the Indian market eroding our own domestic aluminium market share. This year so far 600,000 tonnes of scrap aluminium has been imported and it has been rising roughly by 5%. While the aluminium demand growth is not growing that fast, and that’s what is eroding our market share.

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Published: 30 Jan 2015, 01:01 AM IST
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