Manufacturing of non-ferrous metals are capital intensive and continuous processes, with limited requirement of manual interventions as compared to their user industries viz. construction, automobile, packaging, etc. Consequently, during January till date, when sections of the Chinese economy were under shutdown, demand for the metals has been more impacted because of limited activities in the user industries, as compared to their production.
Higher production of the metals is likely to have turned the Chinese market into a surplus in this period, increasing the inventory in China, and reducing the global deficit, said Icra.
China also plays a key role in the supply chain by manufacturing several intermediates and consumables, required in producing these metals. During the first phase of Covid-19 outbreak when infections and consequent economic shutdown were largely limited to China, production and export of key intermediates from the country was severely impacted.
The correction in non-ferrous metal prices
and the expected large-scale slowdown in demand would impact the credit metrics of the primary metal manufacturers.
The impact was higher for non-integrated aluminium manufacturers procuring alumina from the spot market during Q4 FY2020. Although the increase in TC/RC would have provided a temporary relief to the custom copper smelters, conversion rates may come under pressure, going forward.
According to Icra, the outlook on the domestic primary non-ferrous industry has turned negative especially with metal prices
nearing the lows witnessed in the last down cycle of FY2016.
The total indebtedness of the domestic primary non-ferrous metal
manufacturers is currently high, with a consolidated debt of almost Rs 70,000 crore drawn to fund the large capacity expansion projects commissioned in the past.
With the number of Covid-19 cases shooting up in the US, which is a key consumer of non-ferrous metals, and the increasing risk of the virus spreading in India, the fourth largest non-ferrous metals consumer in the world, improvement in demand conditions in the near- term remain highly uncertain as on date.
“The weak market conditions, which in turn leads to weak price levels would impact the debt coverage indicators of the industry and delay the recovery in debt protection metrics. During FY2019, the estimated Total Debt/EBITDA of the domestic primary non-ferrous metal industry was at about 3.4 times, which would have weakened to 3.9 times in FY2020 and is likely to remain at a similar level in FY2021, given the current market conditions,” said Roy.