Adverse economic developments in China, which accounts for 40 per cent consumption of major metals globally, will negatively impact the metals industry in India, says a rating agency.
"Adverse economic developments in China may have a directionally negative impact on the Indian metals industry as well as on sectors with an export focus," India Ratings and Research (Ind-Ra) said in a statement.
Given the soft demand scenario in China, base metals prices declined in the range of 2-21 per cent in the first six months of 2015, said the domestic arm of global credit rating agency Fitch.
On an year-to-date basis, Chinese domestic hot roll coiled steel prices have declined by 21 per cent, London Metal Exchange (LME) nickel prices by about 12 per cent, LME copper metal prices by 9 per cent and China alumina prices by about 10 per cent.
In the last one month, iron ore prices have fallen by 20 per cent, Shanghai steel prices by 16.4 per cent, zinc prices by 7 per cent, copper prices by 5.6 per cent and aluminium prices by 2.9 per cent, it said.
"The Indian non-ferrous base metal industry is somewhat oligopolistic and commands a strong physical premium. In the event of a sharp fall in metal prices as well as in metal import from Chinese players, the physical premium is likely to fall, impacting industry margins," it has predicted.
If the metal prices do not recover in the short term, the industry may incur an inventory loss and a 2-5 per cent fall in operating profits, it said.
On steel sector in India, Ind-Ra said that imports from China grew 18.4 per cent y-o-y in 2014-15 and iron & steel imports rose the most among the top 10 imports from China.
"While the government increased import duty last month with a lag, it may not be sufficient to increase the competitiveness of Indian steel manufacturers," it has warned.
Indian manufacturers are struggling with low capacity utilisation. With a lukewarm domestic demand scenario, the fall in commodity prices is unlikely to benefit the margins of manufacturing units in the short term.
They may pass on the benefit to customers in an effort to garner higher volumes. Besides, Indian manufacturers may face increased competitive pressure from Chinese manufacturers, it said.
