India Ratings cuts non-ferrous metals sector outlook to negative

Continued fall in metal prices to delay de-leveraging for domestic players

India Ratings has revised the FY17 outlook on domestic non-ferrous metals sector to negative from stable in FY16 on expectations of a continued fall in metal prices.

Although domestic industry players have been maximising free cash flows with cost control and a reduction in working capital cycles, weak demand growth, import pressure, low physical premiums and sub-optimal capacity utilisation were likely to delay deleveraging, said the agency in its report.

China, which consumes 40 per cent to 50 per cent of the global major base metals, is facing an economic slowdown. This means a surplus in the international market and therefore a delay in price recovery. For domestic players, slowing Chinese economic growth implies increased competition from low-cost imports into India as well as competition in the export market.

Prices of major base metals, including aluminium, copper and zinc, declined through April-December. Also, futures market indicate a continued negative sentiment on the price outlook. This is despite a substantial decline in the stock-to-use ratio. This means prices have fallen despite a tighter physical market.

The agency expected the industry to focus on controlling costs to protect operating margins and industry players would continue to optimise production processes, postpone growth capex and suspend unprofitable production lines.

The agency said imported alumina would continue to replace domestic alumina due to the price difference. Non-integrated players in the aluminium sector would record improving operating margins, it said.

India Ratings said the weak domestic demand growth and surplus capacity could lead to low capacity utilisation in FY17. This despite the agency’s expectation of a moderate pick-up in consumption growth during the second half of FY17. For aluminium, near-term new capacity, along with unutilised available capacity, was over 120 per cent of 2015 output. Imports into India were likely to remain steady, with excess capacity in China. Efficient new capacities in China as well as low alumina and energy costs have re-calibrated the cost curve of the global aluminium industry.

For copper, Indian custom smelters were likely to see steady margins with continued surplus in the availability of copper concentrates. For 2016, the agency expected rising volumes and weakness in the rupee to enable these to maintain margins, unaffected by low metal prices, as seen in 2015.

The agency said local premiums for zinc would remain low despite concentration in the market, due to a global surplus. Weak demand in export markets was likely to lead to a surplus despite the global depletion in mining output. Locally, margin benefits of a weak rupee and a decline in energy costs were likely to be offset by lower capacity use and lower byproduct realisation. However, industry players in the lowest quartile of the cost curve and with strong balance sheets were best placed to survive a prolonged period of low prices.