India Ratings maintains negative outlook on base metals sector for H2 FY21

Agency says business disruptions led by Covid-19 likely to persist over next 6-9 months; realisations likely to remain volatile over H2 of FY21

India Ratings and Research (Ind-Ra) has maintained a negative outlook on the base metals sector for 2HFY21.

Business disruptions led by Covid-19 are likely to persist over the next six to nine months, as the pandemic scenario continues to evolve, it said.

Realisations are likely to remain volatile over second half of FY21 and remain predisposed to the US-China trade tensions.

As part of its study, the agency has covered the issuers operating in aluminium, copper and zinc sub-sectors and their likely credit profiles in FY21 and also outlines Ind-Ra’s expectations for FY22.

Covid-19 has induced volatility in base metal prices since mid-January 2020. The fiscal stimulus announced across major economies, especially China, has fuelled a short-term recovery since mid-May 2020 and spurred base metals demand from China with heightened imports over domestic production. This was also supported by Chinese yuan strengthening against US dollar and contributing to cost deflation.

Prices are carrying strong momentum, driven by high Chinese infrastructure stimulus coupled with the realisation of pent-up demand, as economies are gradually opening up, and apprehensions of supply disruptions in case of a resurgence of the pandemic.

The realisations have picked up by 22 per cent, 32.8 per cent and 27.7 per cent in August 2020 for aluminium, copper and zinc, respectively, since April 2020, when LME spot prices were at the lowest.

However, industry fundamentals remain weak with a likely surplus situation in most base metals.

Positive developments on coronavirus vaccines and a gradual global economic recovery thereafter may bring demand recovery in 2HFY22.

Pre-Covid base case estimates for Ind-Ra rated portfolio have been moderated to reflect the negative impact of the pandemic on local premiums, revenues, working capital cycle, credit ratios, and liquidity for FY21.

Accordingly, Ind-Ra has revised the rating outlook to negative for 2HFY21 from stable, reflecting the risk of substantial leverage build-p over FY21-FY22. However, strong business profile features and prudent liquidity management shall aid sector players to tackle such evolving times.

Key domestic players will report improved credit metrics by end-FY22, close to FY20 levels, primarily driven by increased demand from end-user industries, supported by government stimulus and thus, improved profitability. Sustainable cost reduction measures shall enable players to emerge stronger.

Liquidity management including refinancing of debt maturities, capital expenditures and dividends outgo shall remain key monitorables.