After a brief run in the sun in the first half of 2002, the copper business, as with other non-ferrous metals, is facing bleak prospects.
The reasons are not hard to find. Excess inventories and low demand are to blame. Margins of copper manufacturers have also been impacted on the cost front owing to the increasing prices of copper concentrate, as copper mines find it unfeasible to operate in such a bearish scenario.
Thus, refining margins, also called TC/RC margins, have fallen from 14 cents/lb in January 2002 to around 9 c/lb at present. The margin is expected to fall further owing to continuing scarcity of copper concentrate.
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Average inventories on London Metal Exchange (LME) have jumped 17-18 per cent compared to the same period last year in the face of single digit demand growth.
LME inventories have shown marginal decline in the month of October 2002, but that is to be attributed more to the plant shut-down effected by Alcoa in August-September. While the plant does not appear to have restarted, it technically remains a potential threat to copper prices in the near-term.
In the domestic market, the main driver for copper was demand from the jelly filled telecom cables (JFTC) sector. However, the demand for JFTC has all but dried up. Telecom players have shifted to optic fibre cable owing to its significantly higher telecom capacity.
This has forced domestic manufacturers to look beyond Indian shores and step up the proportion of exports in their total sales mix. Ergo, the obvious impact was a fall in margins since domestic markets are more remunerative thanks to presence of import duties.
The problem of over-capacity has been compounded by a string of capacity expansion projects. For instance, Indo Gulf has increased capacity by 50 per cent in the last one year to its current level of 1,50,000 tonnes per annum.
An additional 1,00,000 tonnes will become operational in the first quarter of FY04. That will be more than enough to meet domestic demand of around 2,70,000 tonnes per annum, especially if the company continues operating at capacity utilisation levels in excess of 100 per cent.
So does all this mean that the weak pricing scenario will continue? There are several factors that need to be kept in mind.
First, China continues to be a powerhouse of growth for the metal. That country is expected to be a net importer in the year to the tune of around 7,00,000 tonnes.
Secondly, the copper mine shutdowns globally will inevitably act as a cap on refined copper output. With subsequent reduction in inventories, copper prices may witness a rebound over the medium-term.
In the absence of any significant growth in domestic demand, companies will have to look to the export markets for offloading their production.