Global economic woe is testing even the biggest firms

Marc Sidwell
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VEDANTA shares have been on quite a ride this year. Over the last three months, the shares have outperformed the FTSE 100, up some 10 per cent, but within that timeframe they also spent late August and early September down more than 10 per cent. Over the year to date, a massive rise of 40 per cent by March fell back in line with the index by mid-May, and Vedanta then spent June to September underperforming, before starting its current climb back into positive territory.

Yesterday’s results were in line with expectations, and didn’t move the Indian mining and resources group’s shares much at all, but they did reveal some of the strengths and weaknesses behind its volatility.

First and foremost, thank goodness for oil. Aluminium and metals mining might be what comes to mind first when thinking about Vedanta, but its majority stake in Cairn India, acquired at the end of 2011, gave the group a welcome exposure to the upside of oil and gas prices even as metals suffered. The average price of aluminium in the first half of the year was down 22 per cent. Lead was down 21 per cent, zinc 15 per cent and copper 14 per cent. Vedanta’s revenues for the first six months of the year nevertheless managed to be up 14 per cent to $7.45bn (£4.66bn), largely thanks to the addition of $1.63bn in revenue from Cairn India. Profit before tax was up 16 per cent, to $1.06bn.

This goes to show the power of diversification, but putting your eggs in more than one basket also brings expense and added complexity. Vedanta has also had to spend the year engaged in a process of corporate simplification. Announced in February, this process is on track for completion by the end of the year according to yesterday’s release, if India’s high court approves. The merger of all Vedanta’s Indian assets into Sesa Sterlite should, it promises, offer significant synergies, as well as creating a company big enough to compete at the highest level. It must hope all that will help with debt reduction, with net debt down only about two per cent over the last six months from $10.06bn to $9.84bn.

But trusting restructuring to bring the sort of bounty to Vedanta in 2013 that the addition of Cairn gave to 2012 would be naive. And it will take a sustained recovery in metals prices to bring that share price volatility into line.

Shipbrokers Clarksons is another company finding its fortunes at the mercy of the global economy. Its shares fell yesterday on a profit warning that admitted to even choppier waters than those for which the firm had prepared.

Clarksons shows the value in such tough markets of being a global player, pointing out that it has seen increased transaction volumes in most of its broking operations and grown market share in most areas.

Yet it also reveals the perfect storm that is the current global economy. Slowing trade, a weakened dollar, declining transactions for its specialised financial services are all playing a part in making life difficult. Apparently Clarkson Research Services is still growing well, presumably as clients try to find out exactly how much worse things are going to get.