Sesa Goa Limited (or 'Sesa Goa' or 'the Company') is part of the Vedanta Group, a diversified global metals and mining major. It drives the Group's ferrous minerals business with a commitment to create a world class enterprise through high quality assets, competitive cost of production and superior returns to shareholders.

The Company's core business is iron ore mining. Today, it is India's largest private sector iron ore producer and exporter. In addition, Sesa Goa produces pig iron, met coke and provides proprietary technology in coke manufacturing.

While all these businesses have their focused markets, their performances have a strong relationship to the prevailing economic environment.

Macroeconomic Developments

2010-11 saw the global economic recovery gaining strength. After a de-growth of 0.5% in 2009, world economic output rebounded strongly to register 5% growth in 2010. Much of this impetus came from developing and emerging economies, which witnessed 7.3% growth in 2010 compared to 2.7% in 2009. Thankfully, even the advanced economies recovered from a 3.4% contraction in output in 2009 to a growth of 3% in 2010 (see Chart A).

Economic growth has a direct linkage to steel and, hence, iron ore demand. By October 2010, industrial production in emerging economies such as India and China had already surpassed the pre-crisis levels. Even some of the advanced economies witnessed a pick-up in industrial production.

There is, however, some fear of overheating in key emerging markets such as China and India. In an environment of rising domestic demand, supply side constraints and increased speculative activities are leading to sharp rise in commodity prices such as hydrocarbons, crude oil, minerals, metals and food. With higher consumer and producer price inflation in all key emerging markets, especially India and China, it is not surprising that central banks are raising interest rates and tightening money supply. This carries two risks: first, higher cost of finance affecting consumer demand, current profitability and future investments; and second, the possible slowing down of economic growth. Having said so, the fact is that two of Sesa Goa's primary markets China and India have continued to grow at high rates. Chart B shows how, from the third quarter of calendar 2009, both China and India have registered strong growth rates with the trend continuing throughout 2010. Advanced estimates suggest that while China grew by around 10% in 2010, India will register GDP growth of 8.6% in 2010-11.

The Global Iron and Steel Market

The macroeconomic environment has a significant bearing on global steel demand and supply. Estimates suggest that global steel consumption has grown by around 1.5x of world GDP growth over the last decade. Steel consumption has gained traction with global economic recovery. Chart C shows that after the dip in mid-2008, world crude steel production started recovering in 2009; and by March 2010 it exceeded the pre-crisis level.

Global steel production rose by 16.8%, to 1,414 million tonnes in 2010. With a share of over 44%, China continued to be the driving force in the industry. Crude steel output in China grew by 9.3% to 627 million tonnes.

There were apprehensions in some quarters about a possible long term slowdown in the output of Chinese steel, on account of the completion of many government-backed stimulus projects and restrictions levied by the Chinese government on energy ineicient steel producers. That has not happened. The ?rst quarter of 2011 has again seen a strong uptick in Chinese steel production, driven mainly by the demand for social housing in the interior provinces of China and railways.

In the short- to medium-term, therefore, Chinese steel production is expected to continue to grow fairly rapidly. However, over a longer horizon, one could expect China's steel intensity to start declining as the economy moves away from being investment-driven to being more consumption determined.

The growth in steel output resulted in strong demand for iron ore and met coke. This, coupled with logistics and environment related constraints on the supply side, saw signi?cant increases in prices of these raw materials during much of 2010-11.

With its low cost production base and focus on growing markets, such as China and India, 2010-11 has been a favourable year for Sesa Goa. However, from the supply side, there were some issues, mainly regulatory in nature, that prevented further growth. These are detailed in the business segment review.