Domestic non-ferrous outlook negative as global metal prices crash: Icra

The impact was higher for non-integrated aluminium manufacturers procuring alumina from the spot market during Q4 FY2020
The global outbreak of Covid-19 has impacted the non-ferrous metal industry as prices of the three metals-- aluminium, copper and zinc have corrected by over 16 per cent, 23 per cent and 20 per cent respectively since the beginning of the calendar year 2020.

As per an Icra note, the price corrections in this period have been broadly in two phases, the first being in January when the news on the outbreak of Covid-19 in China came to light.

Subsequently prices stabilised in February, albeit at a lower level than December 2019, as the reported number of fresh cases in China declined. As the virus started spreading to the rest of the world in March, global macro-economic sentiments turned negative once again, and the second phase of price correction was witnessed.

Incidentally, in this period, the markets of the non-ferrous metals are estimated to have remained in deficits globally. Moreover, while a prolonged outbreak would reduce demand for the metals, disruptions in the supply chains would impact availability of the metals in the physical markets.

“In a weak market, sentiments rather than demand supply balance typically determine prices. Consequently, as the number of Covid-19 cases increases in the rest of the world, the risk of a global recession accentuates, leading to a sharp correction in non-ferrous metal prices,” Jayanta Roy, senior vice-president and group head, corporate sector ratings was quoted as saying.

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. 

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