The Hindu : Hindustan Zinc under new owner

Online edition of India's National Newspaper
Monday, Apr 22, 2002

Business

Business

Hindustan Zinc under new owner

Zinc consumption in emerging countries has risen despite the substitution effect and improvement in technology.

THE ZINC sector in India continues to be one where domestic demand far exceeds supply. While this would normally be an ideal situation for suppliers, that is not the case as zinc being a traded commodity and is subject to vagaries of supply-demand in global markets.

Domestic demand for zinc is estimated at 2.70 lakh tonnes annually against the production capacity of around 1.82 lakh tonnes. It is used extensively in dry cell and galvanised steel segments. With galvanised steel market picking up and an overall optimism about the global steel industry prospects, zinc demand too is likely to pick up.

The Indian zinc industry comprises Hindustan Zinc (HZL) and Binani Industries which have a combined capacity of 1.90 lakh tonnes and the shortfall of 80,000 tonnes is met from imports, largely from China.

With Sterlite Industries having picked up a 26 per cent stake in the Government-owned Hindustan Zinc for Rs. 445 crores, the segment has now come into the private sector. Also, with both players — HZL and Binani — having expansion plans in place, in future, the demand supply gap will be significantly narrowed.

Zinc production entails high power consumption; up to 30 per cent of the total production costs. It comes as no surprise that zinc producers would have cogeneration facilities to keep a check on costs. But in the domestic industry, players outsource their power requirements from State electricity boards. The impact of a further hike in power tariffs could be felt by the players.

Zinc consumption in industrialised countries is virtually stagnant due to replacement by alternatives such as aluminium and plastics. But zinc consumption in emerging countries has risen despite the substitution effect and improvement in technology. This is expected to increase with rapid industrialisation in end-user industries such as transport, infrastructure and building activities. Zinc is used mainly in galvanising industries followed by dry batteries, alloys, die-casting and chemicals. In India, as in the rest of the world, galvanising accounts for the largest share of consumption around 50 per cent.

Zinc prices have come down significantly and steadily from a spot rate of $1700 a tonne in July 1997. At present, it is quoted at $832 against $1120 last year. Prices in the domestic market have been hovering around Rs. 64,000-65,000 a tonne.

Having picked up 26 per cent stake in Hindustan Zinc, Sterlite is making an open offer to acquire a further 20 per cent stake in HZL. Sterlite also appointed six directors to the board of Hindustan Zinc in accordance with the provisions of the shareholders' agreement, thereby giving it a majority in the 11 member board. The acquisition was made through Sterlite Opportunities and Ventures Ltd (SOVL), a Sterlite group company.

"It will be our endeavour to make Hindustan Zinc a world class zinc and lead producer and strengthen our presence in this area globally. With Hindustan Zinc, in our fold, we are uniquely positioned in the non-ferrous mining and metals industry with significant presence in aluminium, copper, lead and zinc. I strongly believe this broad-based presence will benefit our customers, shareholders, our partners and employees," said Anil Agarwal, Chairman, Sterlite Group. Also, Kuldeep Kaura will be the Managing Director of Hindustan Zinc.

HZL has six lead-zinc mines with a combined annual capacity of 3.49 million tonnes. It also has four lead-zinc smelters with zinc capacity being 1.52 lakh tonnes and lead being 43,000 tonnes. HZL is the only integrated primary producer of zinc and lead in the country and accounts for 80 per cent of the total zinc production.

HZL's lead smelter in Visakhapatnam employs around 250 workers and has planned a VRS. However, Sterlite, post- disinvestment, announced that it would not retrench employees for over a year. Also, there is a rock phosphate mine in Rajasthan where resources are dwindling and over 400 workers are employed.

HZL's performance for the quarter ended December 2001 was affected by the global slowdown and oversupply situation in the zinc market. Sales were down 16 per cent at Rs. 347.60 crores and the net profit at Rs. 4 crores against Rs. 68.20 crores in the corresponding period of the previous year.

Hindustan Zinc's strength is its favourable operating efficiency which is largely due to fully integrated operations from mining to production of the metal. The company has long-term leases for sourcing ore at its six mines and these are enough to take care of the requirements for the short to medium term. Owing to these factors, HZL's cost structure is comparable to global players.

The Binanis had earlier opted out of the bidding for the 26 per cent stake in HZL largely because their priority was to increase their own capacity. Binani Industries (BIL) has worked out a restructuring proposal and will hive off its zinc division into a separate company Binani Zinc. Under the proposal, the assets and liabilities of the zinc division will be transferred to Binani Zinc (BZL) from April 1, 2002. The shareholders of BIL will be allotted three shares of BZL for every 13 shares of BIL free of cost and the balance will be allotted to BIL. This would enable the company to go ahead with the expansion to raise zinc capacity to 1.38 lakh tonnes from 30,000 tonnes at a cost of around Rs. 450 crores.

The government reduced the import duty on zinc by 10 per cent and has made its intention clear to reduce this further. Binani is totally dependent on imported concentrates which constitute more than 50 per cent of cost of production.

The success of the company's proposal for restructuring is dependent on approval by the institutions. The board has approved restructuring of subsidiaries, Binani Cement and Goa Glass Fibre. The scheme also entails use of the share premium account to provide for interest and structuring fees amounting to Rs. 36.20 crores.

Ramnath Subbu

in Mumbai

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