Outlook on non ferrous metals: ICRA
ICRA Research Services has come out with its report on Indian non ferrous metals industry. According to the research firm, demand for aluminium is India is derived mostly from the power and construction sectors that together contribute to around 55% of domestic aluminium onsumption.
November 09, 2012 / 17:21 IST
ICRA Research Services has come out with its report on Indian non ferrous metals industry. According to the research firm, demand for aluminium is India is derived mostly from the power and construction sectors that together contribute to around 55% of domestic aluminium onsumption. Aluminium capacity expansion projects are expected to be commissioned in the short to medium term.
The primary base metal industry in India including aluminium, copper and zinc is highly concentrated among a few large players, viz. the Vedanta Group, Hindalco Industries Limited, National Aluminium Company Limited and Hindustan Copper Limited. However, the downstream segment is highly fragmented, with the presence of a large number of smaller players and a few medium-sized players. China is the largest country for both production and consumption of these non-ferrous metals, whereas the consumption of these metals in India account for only about 5% or less of the global consumption. Consequently, Indian players have limited influence on the global demand-supply position. The domestic prices, therefore, largely reflect the international prices and the currency movements. In view of this, the report has primarily focused on the global production, consumption and price trends before discussing the domestic scenario.AluminiumGlobal aluminium consumption during January to June 2012 (H1CY2012) increased to around 22 million metric tons (MMT) from around 21 MMT in H1CY2011, reflecting a growth rate of around 3% as against a growth rate of 7% in CY2011 to reach around 45 MMT. Given the weak economic outlook, demand for aluminium in the global market is expected to remain muted, at least in the near term. Over 40% of global aluminium consumption during H1CY2012 was driven by China. Average aluminium prices at the London Metal Exchange (LME) during April-June 2012 (Q1FY13) were almost 22% lower than the same in Q1FY12 as a consequence of the ongoing global economic slowdown. At current prices, a large proportion of primary aluminium producers world-wide are estimated to be incurring losses. However, a 20% depreciated INR to around Rs 55/USD during Q1FY13 over Rs 45/USD during Q1FY12 provided some relief to the domestic primary aluminium players. In addition, with production shutdowns initiated by some of the global manufacturers and the existing supply deficit in the global aluminium market, prices are expected to find a support at current levels going forward. The extent of the upward movement however might be largely dependent on the health of the Chinese economy and the steps taken by the country to boost demand.India contributes around 4% to the global aluminium consumption and turned a net importer of the metal in the financial year ended March 2011 (FY11), owing to consumption growth outpacing production growth in the last three years. Demand for aluminium is India is derived mostly from the power and construction sectors that together contribute to around 55% of domestic aluminium consumption. Anticipating a significant increase in domestic aluminium demand, the primary aluminium manufacturers have undertaken large alumina and aluminium capacity expansion projects that are expected to be commissioned in the short to medium term. However, the extent of capacity expansion is estimated to outweigh the anticipated growth in demand and would therefore create significant surplus aluminium capacity in the domestic market in the medium term, assuming timely commissioning.Industry conditions in FY12 and H1FY13 remained challenging for the domestic primary aluminium players because of input cost pressures and depressed metal prices. Consequently, FY12 and H1FY13 saw their margins erode substantially as compared to the same in FY11 and H1FY12 respectively. High power generation costs on the back of rising domestic coal prices, coupled with increasing prices of raw materials have led to deterioration in the cost structure of these manufacturers. Notwithstanding the same, the overall cost structure of most of the domestic primary manufacturers is favourable, especially of those with captive bauxite mines. For the downstream segment, primary aluminium is the largest cost component, and players in this segment typically have a low bargaining power against the large primary aluminium suppliers. Moreover, given the presence of a large number of players, realizations in the segment are exposed to competitive pressures that further adversely affect margins in this segment.Copper:The global apparent consumption of copper has grown by 6.2% while the refined production grew by 2.2% during the period January – July 2012, against compounded annual growth rates (CAGRs) of 2.9% and 2.3% respectively during the period CY2001-11. The sharp growth in apparent consumption during the current year, which was primarily led by strong imports by China, possibly indicates increased warehouse inventories rather than actual consumption, since industrial growth rate in that country has moderated over the last few quarters. Although the near term demand outlook for copper is weak owing to the ongoing global economic slowdown and copper prices have been weighed down since the middle of CY2011 due to bearish sentiments, supply constraints are expected to provide support to the prices to an extent. Over the medium term, however, global supplies are expected to ease on the back of mine capacity additions, while the pace of consumption growth would primarily depend upon the recovery in the macro-economic environment (particularly China). Copper prices could, therefore, witness some moderation over the medium term, but a significant fall appears unlikely, since the market is only expected to slide gradually into a surplus situation.The smelting and refining charges, which have witnessed a sharp volatility over the last one-and-half years, are likely to post further recovery over the medium term, with the concentrate supply being expected to slide gradually into surplus. The domestic primary copper market is dominated by two large custom smelters and a smaller, but vertically integrated player. With domestic refined copper supply exceeding demand, the surplus is exported. Despite the favourable demand outlook for copper in the country, exports are likely to continue due to the prevailing large gap between supply and demand. The downstream segment in India typically faces margin pressure and witnesses moderate profitability, due to limited value addition in their business and high competitive intensity arising from the fragmented nature of the industry.Zinc:During the period January – July 2012, mined production of zinc in the world grew sharply by 10.5%, led primarily by an increase in Chinese output, while the refined production declined marginally by 1.4%, as smelters slashed output to adjust the inventories in line with the muted demand growth of 0.5% in this period. Zinc prices, which weakened over the last three quarters due to the uncertainty in recovery of the global economy, are likely to remain soft in the near term, as consumption growth is expected to remain moderate. The global zinc market, which is current in surplus, is expected to move into a deficit situation over the medium to long term due to mine depletions and fall in ore grade, thereby pointing to a likely hardening of zinc prices. The domestic primary zinc market is dominated by Hindustan Zinc Limited, which is an integrated player. Going forward, galvanisation, which remains the key user segment for zinc, is expected to witness healthy demand growth in India on the back of continued urbanisation / infrastructure development in the country.Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.To read the full report click on the attachment 
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