 "Profitability of base metal producers to improve on rising demand")
Profitability of base metals producers in India is likely to improve in the next three years following an upsurge in demand from power, construction and automotive sectors, the three major segments contributing around 60% of metal consumption.
Companies with better access to raw materials like Hindalco Industries, Vedanta Ltd, Hindustan Copper and National Aluminium Company - would benefit more than independent producers.
Riding on the back of favourable supply-demand dynamics and more reliable link to raw materials, base metals demand in India is likely to witness 8-10% growth in the next three years.
The upsurge in demand will be driven largely by over 7.5% growth estimated in the gross domestic product (GDP) which would attract investment in power, construction and automotive sectors.
Also, better access to raw materials would help companies plan concrete future business strategy.
The growth in consumption assumes significance especially in the wake of falling metal prices globally which affected financial performance of Indian producers. A sharp increase in metal demand would help improve financial performance of base metals producers.
Companies with better access to raw materials like Hindalco Industries, Vedanta Ltd, Hindustan Copper and National Aluminium Company - would benefit more than independent producers.
Riding on the back of favourable supply-demand dynamics and more reliable link to raw materials, base metals demand in India is likely to witness 8-10% growth in the next three years.
The upsurge in demand will be driven largely by over 7.5% growth estimated in the gross domestic product (GDP) which would attract investment in power, construction and automotive sectors.
Also, better access to raw materials would help companies plan concrete future business strategy.
The growth in consumption assumes significance especially in the wake of falling metal prices globally which affected financial performance of Indian producers. A sharp increase in metal demand would help improve financial performance of base metals producers.
“India’s largest base metals manufacturers will benefit from favorable supply-demand dynamics in the domestic market and more reliable access to raw materials in the coming few years. We expect India’s consumption of base metals to increase by 8-10% annually over the next three years, driven primarily by demand from three sectors: power, construction and automotive. Our projections reflect domestic GDP growth and the government’s efforts to boost infrastructure spending,” said Philipp Lotter, Managing Director – Corporate Finance, Moody’s Investors Service in a report.
The benefit, however, would vary. While Hindalco and Hindustan Zinc are set to see the biggest profitability gains owing to their captive raw material sources and expanding production capacity, public sector Hindustan Copper may get limited benefit owing to its lower scalability.
Vedanta Ltd., on a standalone basis, is expanding, but its limited access to raw materials may constrain its profitability. National Aluminium Company has captive raw material sources, but its limited production capacity would cap the growth.
Profitability of metals producers was hit badly during the last financial year on falling demand from consumer industries. Steep fall in global prices also hit Indian producers badly.
Hindalco, for example, posted Rs 925 crore of net profit for FY 15 as against Rs 1413 crore in the previous year on standalone basis, a decline of 35%. On consolidated basis, too, its net profit fell by a staggering 61% to Rs 854 crore from Rs 2175 crore in FY ’14.
Another metal producer Vedanta Ltd posted a net profit of Rs 1927.20 crore for the year ended March 31, 2015 as against Rs 1076.09 crore for the previous year.
Meanwhile, India’s production capacity for all three base metals is sufficient to meet the increased demand, having grown sharply over the past decade.
The aluminium sector will become oversupplied owing to large expansion projects underway, so manufacturers will continue to rely on exports to maintain high utilization rates. The increased demand for copper and zinc will absorb some of the existing excess capacity for those metals.
“Looking at the metals, they are actually quite oversold from a technical point of view and, fundamentally, we don’t think things are that bad in many of the supply-demand balances. Lower prices should trigger some production cutbacks too, which will help to tighten things up further, as will any consumer/strategic bargain-hunting. What price triggers the China’s SRB to buy again? So we wouldn’t be surprised to see some rebounds in the coming weeks. Triggers might include a resolution to the Greek crisis, more effective action from Chinese policymakers to stabilise the rout and shore up sentiment, and even signs that all the turmoil and heighten risks in financial markets have turned the Fed more dovish, delaying the expected September rate rise,” said Andrew Cole, principal analyst, Metal Bulletin Research from London.
Moody’s said that the Indian mines and mineral law that went into effect earlier this year aims to increase the availability of minerals and fuel sources for domestic metals companies. Prices for these materials should decline as a result and subsequently support metals manufacturers’ profitability.