Vedanta’s iron ore and copper output underperform

Vedanta group’s output data release for the March quarter coincided with the release of China’s trade statistics. The country’s imports during the quarter rose by only 6.9%, another proof that its economy is indeed slowing. That’s a worry for metal firms, as China’s waning appetite for metals can affect both output and prices globally.

Shares of Vedanta group’s metal firms were immediately reacting to the output numbers. Sesa Goa Ltd and Sterlite Industries (India) Ltd saw their shares decline by about 1.5%. Sesa Goa’s output performance was good, as output was up by 48.5% quarter-on-quarter (q-o-q), driven by its Goa mining operations. This compensated for zero output in Karnataka, where mining has been banned. But iron ore sales rose by just 4% q-o-q as it could not transport enough ore due to differences over freight rates with transporters.

Though the stocks can be sold in subsequent quarters, the onset of the monsoon rain in Goa in the current quarter will see both mining and shipping of iron ore coming to a halt. Hindustan Zinc Ltd saw its refined zinc output remain flat sequentially, while lead output rose by 27.6% and silver rose by 53.1%. The firm is lowering production at an older higher-cost smelter, which will be made up for by higher production at its new facilities in Rajasthan.

Average zinc and lead prices on the London Metal Exchange (LME) during the quarter were up by about 6.4% and 5% sequentially. That should contribute to higher sales growth, but silver will provide a significant bump-up to both sales and profit during the quarter.

Sterlite’s domestic and international custom smelting operations saw output decline by 4.8% and 12%, respectively, due to shortage of copper concentrate. Aluminium output was up by 4.1% q-o-q, which along with a 4% increase in average realizations during the quarter will offset, to some extent, the poor showing in its copper business. The group has projected a slightly higher lead and zinc mined metal output in 2012-13, thanks to the ramp-up in its mining operations. Production of silver is expected to be 41% higher, but is lower than its earlier estimates due to changes in the actual silver content.

A recovery in its iron ore mining business will depend on its ability to resolve the transportation dispute, or the resumption of mining in Karnataka. The first may happen too late as the monsoon may set in, while the other is uncertain. Power will continue to be a key element of its performance, particularly if coal supplies improve during the year.

Though output may increase, investors will be more concerned about metal prices, as they dictate profitability. If India’s economic growth remains low, and China’s settles into a slower growth trajectory, then metal prices are likely to turn weaker, which, in turn, will affect performance.

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