 "High royalty payment is a big challenge: Sunil Duggal")
The 30 per cent fall in zinc prices over 2015 has hit most producers globally and Hindustan Zinc (HZL) is no exception. It has adopted various cost cutting measures but high royalty payment continues to pose a challenge, says Sunil Duggal, chief executive officer, to Dilip Kumar Jha. Edited excerpts:
How have falling metal prices impacted HZL?
This has limited our top line (revenue) and squeezed margins. More than that, India has the highest effective royalty rates in the world, a challenge in this environment. These currently work out to 10 per cent on zinc, 14.5 per cent on lead and seven per cent on silver. We paid Rs 1,243 crore royalty to state governments and an additional Rs 3,915 crore to the exchequer (last year). We are focused to mitigate this by tapping full potential for cost optimisation.
High scale, low cost and high market shares, and a resilient focus on enhancing efficiency and maintaining cost discipline. We are an integrated miner, with own smelters to process the ore from our mines into refined metal, which saves us the market uncertainties on availability of raw material or commercial constraints. The proximity of our mines and smelters and our self-sufficiency in power gives us a big edge.
Continuous improvement is the key to success and we’ve taken up several optimisation and improvement initiatives. Globally, companies are reviewing their mining portfolios, as competitiveness of some assets is challenging in the current market scenario.
What is your future growth focus?
HZL has always believed in first catering to domestic demand. We’re also enhancing our product portfolio. Signs of growth and a positive outlook are surfacing for the Indian manufacturing sector. Power and infrastructure projects announced by the government are now starting. The galvanised steel sector will be the prime demand driver for zinc as infrastructure projects pick up momentum. The automobile sector is another which will boost demand, as awareness is increasing about the advantages of a galvanised car body and more manufacturers are considering this alternative. In addition, many new uses of zinc are coming up, like in fertilisers or galvanised rebars in construction. We believe HZL is well positioned to leverage domestic demand and our expansion projects are aptly aligned with the country’s growth prospects.
Zinc and lead prices are forecast to remain subdued, despite deficit estimates by the International Lead and Zinc Study Group, on weak demand. How does this affect your business?
Metal fundamentals have a major impact on long-term price trends. Specifically for zinc, its fundamentals continue to remain strong. We expect prices to rebound, as about a million tonnes of mine supply is expected to be taken off with Glencore and some others in China announcing a production cut and some high-profile mines (Century & Lisheen) are closing this year.
What would be your strategy to protect the profit margins?
The commodity market is highly speculative. It is essential to maintain operational discipline and continuously challenge efficiencies to greater levels. We have time and again done this in the past and this is reflected in our margins. Our high-quality assets and integrated operations give us the advantage of low cost of production. We have undertaken several efficiency and cost optimisation projects, which are now paying off.
Global majors have started a cut in output on weak demand. Will you follow?
HZL is one of the lowest cost zinc operations in the world but it's important in these weak markets to stay competitive. Our mining asset portfolio is diversified in terms of asset class, type of mining method and standalone profitability. As long as each tonne of production can generate positive cash flow, we will keep these assets running. If we have marginal assets in these markets, we will work hard to improve the cost performance, so that they can remain profitable. We shall be pursuing strategic alternatives for our mining assets, individually and as a portfolio.
How have falling metal prices impacted HZL?
This has limited our top line (revenue) and squeezed margins. More than that, India has the highest effective royalty rates in the world, a challenge in this environment. These currently work out to 10 per cent on zinc, 14.5 per cent on lead and seven per cent on silver. We paid Rs 1,243 crore royalty to state governments and an additional Rs 3,915 crore to the exchequer (last year). We are focused to mitigate this by tapping full potential for cost optimisation.
More From This Section
What is your competitive advantage?
High scale, low cost and high market shares, and a resilient focus on enhancing efficiency and maintaining cost discipline. We are an integrated miner, with own smelters to process the ore from our mines into refined metal, which saves us the market uncertainties on availability of raw material or commercial constraints. The proximity of our mines and smelters and our self-sufficiency in power gives us a big edge.
Continuous improvement is the key to success and we’ve taken up several optimisation and improvement initiatives. Globally, companies are reviewing their mining portfolios, as competitiveness of some assets is challenging in the current market scenario.
What is your future growth focus?
HZL has always believed in first catering to domestic demand. We’re also enhancing our product portfolio. Signs of growth and a positive outlook are surfacing for the Indian manufacturing sector. Power and infrastructure projects announced by the government are now starting. The galvanised steel sector will be the prime demand driver for zinc as infrastructure projects pick up momentum. The automobile sector is another which will boost demand, as awareness is increasing about the advantages of a galvanised car body and more manufacturers are considering this alternative. In addition, many new uses of zinc are coming up, like in fertilisers or galvanised rebars in construction. We believe HZL is well positioned to leverage domestic demand and our expansion projects are aptly aligned with the country’s growth prospects.
Zinc and lead prices are forecast to remain subdued, despite deficit estimates by the International Lead and Zinc Study Group, on weak demand. How does this affect your business?
Metal fundamentals have a major impact on long-term price trends. Specifically for zinc, its fundamentals continue to remain strong. We expect prices to rebound, as about a million tonnes of mine supply is expected to be taken off with Glencore and some others in China announcing a production cut and some high-profile mines (Century & Lisheen) are closing this year.
What would be your strategy to protect the profit margins?
The commodity market is highly speculative. It is essential to maintain operational discipline and continuously challenge efficiencies to greater levels. We have time and again done this in the past and this is reflected in our margins. Our high-quality assets and integrated operations give us the advantage of low cost of production. We have undertaken several efficiency and cost optimisation projects, which are now paying off.
Global majors have started a cut in output on weak demand. Will you follow?
HZL is one of the lowest cost zinc operations in the world but it's important in these weak markets to stay competitive. Our mining asset portfolio is diversified in terms of asset class, type of mining method and standalone profitability. As long as each tonne of production can generate positive cash flow, we will keep these assets running. If we have marginal assets in these markets, we will work hard to improve the cost performance, so that they can remain profitable. We shall be pursuing strategic alternatives for our mining assets, individually and as a portfolio.