Struggling before lockdown, copper manufacturers stare at meltdown

The anticipated economic slump is likely to weaken their prospects

Well before the first Covid-19 case was detected in Kerala on January 30, the 968,500-tonne Indian re­fined copper industry came under significant pressure caused by shrinking requisition of the red metal by most user segments. The aluminium-to-co­pper group Hindalco Industries says in the third quarter (October to December) of the 2019-20 financial year, domestic copper demand was up just 2 per cent to 193,000 tonnes from 189,000 tonnes in the same period of the previous year. Also worrying for local producers who find their share of the domestic market whittled down by imports was that sales during October to December shrank 17 per cent to 94,000 tonnes. Imports gave foreign-origin copper a share of 51 per cent of domestic market in the third quarter against 40 per cent in the same period of 2018-19.

This could not have been otherwise with imports during the period rising a whopping 30 per cent to 99,000 tonnes. For Hindalco, lower volumes and realisations combined to bring down EBITDA (earnings before interest, tax, depreciation and amortisation) for the third quarter by 48 per cent on a year-on-year basis to Rs 256 crore from Rs 490 crore. Awaiting the results of the 2019-20 final quarter, it can be said that since copper demand came under the Covid-19-related squeeze and realisations continuing to stay low, primary and secondary producers of refined copper will have nothing good to report.

Globally too, copper, like other non-ferrous metals, faced rough times with refined copper use suffering a decline of 0.3 per cent to 23.5 million tonnes (mt) in 2019. World demand grew by 3.1 per cent to 23.6 mt in the previous year. A big let-down was China, which has 49 per cent share of world use of the metal where demand growth last year slid to 1 per cent to 11.8 mt. In 2018, that country’s copper consumption grew by 5 per cent to 11.7 mt. World consumption, excluding China fell 1.7 per cent to 11.6 mt from 11.8 mt in 2018 when demand was up 1.3 per cent. Compared to China, India is a much smaller market for the red metal. But as CARE Ratings says, Indian demand for refined copper grew at a CAGR of 4.2 per cent from 599,000 tonnes in 2014-15 to 705,000 tonnes in 2018-19. Only 2016-17 saw a blip when demand was down by 24,000 tonnes to 666,000 tonnes.

 

 

The lockdown, needed to fight the Covid-19 pande­mic, will have a major bearing on the outlook for the copper industry in the current year as some of the major use centres for the metal such as electrical and telecommunications, building and construction and transport have been in limbo. Moreover, the loosening of the rigours of lockdown will not automatically lead to revival of activities in some sectors that are major copper consumers. For instance, automobile manufacturers from Maruti Suzuki to Mahindra & Mahindra have such large inventories of vehicles that their immediate concern will be to dispose of stocks. A Vedanta spokesperson admits that the first quarter ending June will be a washout for copper. Industry analysts are not hopeful of any significant demand revival in the second quarter either as people recovering from the pandemic shock will be inclined to postpone discretionary spending for quite some time. They are taking seriously the warning of a second wave of the virus or a mutation of Covid-19 during the winter. So, like all industries, the mantra for individuals is to conserve cash.  

The Covid-19 outbreak here coincided with the time manufacturers of air-conditioners and refrigerators that use copper coils and tubes go all out for marketing. Unfortunately, this is proving to be a lost season for them. Co­mpare this with double-digit growth in sales of air-conditioners and refrigerators that the country has seen in recent years. Conventional gas-powered cars will have in them anything between 18 and 50 pounds of copper. All that de­mand now is frozen. Some in industry hope the government will support in­frastructure and power development projects to rev up the economy. No doubt, a push to Pradhan Mantri Awaas Yojana will be a demand driver for copper, a metal much in use in plumbing. The question is how the government will find money in times of poor tax collection. Our own Confederation of Indian Industry says in a worst case scenario the country’s GDP could contract by 0.9 per cent.

In the context of what International Monetary Fund foresees for the world economy, Indian copper exports, down substantially since the closure of Ve­danta’s 400,000 tonne smelter at Tu­ticorin in Tamil Nadu in May 2018, will face major challenges. The country, traditionally a net exporter till 2017-18 when its overseas sales am­ounted to 378,000 tonnes compared with imports of 36,000 tonnes, turned a net importer in the following year. Imports of 84,000 tonnes in 2018-19 dwarfed exports of 48,000 tonnes. In­dustry officials are arguing that for reasons of health and safety, India like Chi­na and some other Asian countries should guard against arrivals of hazardous copper scrap and waste in the country.

The Vedanta official says New Delhi should raise import tax on copper scrap to 7.5 per cent from 5 per cent. The proposal, however, meets with strong opposition from secondary makers of refined copper whose competitiveness will take a hit if more duty is loaded on scrap imports. One way out of the situation is to give a thrust to domestic procurement of new scrap generated in the process of semi fabrication and finished products making and old scrap recovered from end-of-life products. New Delhi is taking too long to announce a scrappage policy that will make it obligatory for owners to send end-of-life vehicles (ELVs) to fully mechanised recycling units that are coming up in different parts of the country. The ELVs on their dismantling will be an important source of old scrap as will be many white goods, computers and cell phones on their recycling.

Global demand fall has made exports a challenging task. The Vedanta official says more than ever before, the industry needs 3 to 4 per cent market-linked focus product export incentive for copper cathode and wire rods to become competitive in the world market. At the same time, given that India’s own production of copper ore could meet only around 10 per cent requirement of local smelters, the government should let them import ore at zero duty.