eRaw material problems plague sector

IN FOCUS / COPPER

The current period is a difficult one for Indian copper smelters as the supply position of concentrates is tight and conversion charges are the lowest in last five years.

Credit rating agency ICRA said in report that the recent decrease in custom duty differentials have narrowed margins of most of the players despite the price hike in copper products.

The price hike may be sustained, and ICRA warned that international copper prices may witness volatility in near future.

Shortage in supply is expected in the international copper markets during calendar years 2004 and 2005.

This could cause prices to be sustained at current high levels. The Asian region may face short supply of more than 2 million tonnes during this period, the ICRA report warned.

The recovery in copper prices in the current financial year was likely to encourage global copper producers to restart closed copper mining facilities, the report said.

This could ease the tight position in copper concentrate supply thereby improving the TC/RC charges for copper producers in the coming months.

However, these factors would keep the domestic copper industry under pressure, ICRA's report spelt out.

There was likely to oversupply in the domestic market and as margins on export sales were lower than sales in the domestic market, there would be pressure on the bottomline of major players.

Recovery in processing charges would benefit the domestic industry but decreasing duty differentials would keep margins under pressure.

Big players like Hindalco and Sterlite would be protected to some extent as their large scale of operations offered lower costs, However, smaller producers would face problems.

The copper production sector was impacted by the lowering of customs duty on finished copper by 5 per cent to 20 per cent and removal of the special additional duty (SAD) on import of copper in the interim budget for the current financial year.

The final budget for the fiscal announced in July 2004 further lowered custom duty on finished copper to 15 per cent.

The duty cut led to lower domestic prices as the landed cost of copper imported into the country declined. However, it also led to lower operating margins.

With most of the copper concentrate required for producing finished copper in the country being imported, margins available to copper producers were largely dependent on the duty differential between finished copper and copper concentrates. This differential was now at 10 per cent from 15 per cent earlier.

In addition, the duty cut on finished or refined copper was not matched by a similar cut in copper ores and concentrates. As a result, the cost of raw materials used to produce copper in India have remained high, the report indicated.

World copper prices neared 10-year highs last week on the London Metal Exchange (LME). Analysts overseas have attributed the rise to China's appetite for base metals, although credit controls imposed in April cooled demand there.

China was using copper mostly in electrical wiring, to feed its construction, car and power industries.