Tepid base metal prices on LME may play spoilsport for Vedanta stock

Volatility in base metal prices on the London Metal Exchange due to trade war concerns may keep Street cautious on Vedanta stock

Vedanta’s March quarter (Q4) results faced the heat of decline in base metal prices yet again — the key reason for its results not meeting revenue estimates.

Lower zinc output and production disruption in the Tuticorin copper smelter also hit the firm, though depreciation in the rupee, coupled with contribution from the newly acquired steel business mitigated the impact to some extent. 

Aluminium prices on the London Metal Exchange (LME) averaged about 14 per cent lower year-on-year (YoY) in Q4, and 6 per cent lower sequentially.  Zinc, lead, and copper prices, too, averaged 11-21 per cent lower YoY, though they rebounded 3-4 per cent sequentially. Therefore, the aluminium segment’s operating performance slipped into the red, despite a reduction in the cost of production.

While increased coal and bauxite sourcing helped boost alumina production and also aided in reducing the cost of production of aluminium to $1,700-1,800 levels (down by about $250 a tonne, which is significant), aluminium prices continue to remain under pressure on the LME. 

Prices have, so far, declined by about $140 a tonne in the current quarters and stand at over a two-year low. 

The copper segment dipped into losses after the production disruption in Tuticorin. Lower production by Hindustan Zinc, as well as soft zinc prices, also impacted operating performance. 

Having said that, rising production in international operations, turnaround of the newly acquired Electrosteel plants, and higher Karnataka iron ore sales, all helped mitigate the impact of soft prices to a certain extent. Nevertheless, operating profits slipped close to 20 per cent YoY. 

Vedanta has recognised mark-to-market gains ($150 million) on its economic interest in the structured investment in Anglo American by Volcan Investments’ in Q4. 

These MTM gains inflated the bottom line as well. While the gains allay some concerns over earlier investments, analysts at Motilal Oswal Securities, nevertheless, say that investors are concerned about the company’s future capital allocation.