ICRA Ratings expects a bumpy road ahead for the primary non-ferrous metal industry, owing to the challenging operating environment following significant metal price corrections and elevated coal costs in the current fiscal.
The profitability is estimated to witness significant headwinds in the first half of the financial year 2022-23, and some respite is likely only in the second half of FY23, the ratings agency says.
International prices of base metals have contracted by a steep 25-40% in FY23 so far, compared to the record high set in March 2022. While the metal prices were under some pressure from the end of May 2022, the major correction happened in the second quarter of FY23, when the prices sequentially corrected by another 18-20%.
Weak global sentiments, a result of slowing Chinese demand and monetary policy tightening in major global economies, is likely to have a negative impact on global non-ferrous metal demand in the calendar year 2022, says ICRA.
The Gross Domestic Product (GDP) and Purchasing Managers Index (PMI) data of major global economies for the most recent quarter also reflect continued macro-economic concerns. In recent months, the regional premia across markets have also come under pressure owing to bearish macro-economic sentiments.
"The metals balance is likely to remain in deficit owing to production cut for aluminium and zinc in Europe, amid higher energy prices in the region. The copper supply was also hit in Q2 CY2022 owing to prolonged protests in large mines of Peru. Therefore, we expect metal prices to remain range bound in coming quarters,” says Jayanta Roy, senior vice-president and group head, Corporate Sector Ratings, ICRA.
While the likely deficit situation would provide support to base metal prices, heightened fears of weakening global demand would limit upward movement in the near term, Roy adds.
In the domestic market, power costs have significantly increased for domestic base metal companies, owing to the lower availability of coal linkages to non-power sectors and elevated coal prices in both domestic e-auction and the international markets.
ICRA notes that the domestic e-auction premia on coal, though it has eased in recent months, continues to remain high at around 300%. With elevated coal costs, the profitability of domestic entities would be adversely impacted, primarily for power-intensive metals such as aluminium and zinc. The price of alumina, on the other hand, reduced along with the price of aluminium, providing some relief to the non-integrated players.
"Owing to the twin onslaught of corrections in metal prices and continued high coal costs, the estimated operating profitability of domestic players is likely to contract by 600-700 bps in FY2023 after a weak performance in Q1 FY2023. The elevated cost of coal remains a near-term concern," Roy says.
ICRA had revised the outlook of the base metal industry to ‘Stable’ from ‘Positive’ in July 2022 owing to this expected decline in profitability.
Domestic demand for non-ferrous metals, however, would remain healthy at 5-6% in FY23, given the government’s thrust on infrastructure development alongside an uptick in the real estate industry.
