India Ratings maintains negative outlook for base metal sector

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MUMBAI: India Ratings and Research maintained its negative outlook for the base metal sector for the next financial year as new capacity ramp-up amid weak demand growth is likely to result in a surplus market, putting pressure on premiums.

It added that a sharp increase in coal prices worldwide has had a positive impact on base metal prices, though global metal consumption growth weakened.

India Ratings maintains a negative credit outlook on sector participants, as balance sheet leverage levels are likely to remain high, with weak premiums and cost pressure partly offsetting the benefits of high metal prices.

“An increase in base metal demand from the US, driven by a likely increase in infrastructure spending, may not fully offset weak demand from China,” the report stated. “The implementation of large infrastructure projects takes substantial time and may not mean an immediate increase in demand. The positive sentiment arising from high infrastructure spending may be short-lived.”

China accounts for 45%-50% of the global consumption of base metals such as aluminium, copper and zinc, while the US represents 8%-10%. China has registered weakened growth in the consumption of base metals.

India Ratings expects key sector players to continue to register high net leverage levels relative to their ratings, despite a higher average realisation in FY17 compared with that in FY16.

Balance sheets of players were substantially affected in the last two years owing to a significant decline in metal prices amid significant growth capex. Although new capacity expansion will take full effect in FY18, such players will face margin pressure due to excess capacity and competition in export markets.

Aluminium capacity in India is likely to more or less double in FY18 on account of new capacity ramp-up, according to India Ratings.

“Although domestic aluminium demand is likely to improve, given the size of new capacity addition, incremental volumes will have to be pushed in low-margin yielding export markets. The addition of new, efficient capacity, which benefits from low power costs, by China and Saudi Arabia will recalibrate the cost structure in the sector and, therefore, prices,” it stated.

India Ratings expects domestic copper custom smelters to earn lower treatment and refining charges (TcRc) and, therefore, register lower operating margin levels in FY18. Some of the recent TcRc fee negotiations by major smelters in China and Japan are lower than that negotiated for most of FY17, it added.

The rating agency expects domestic demand to remain stable with an upward bias in FY18, supported by infrastructure spending by the government.

“The key end-user industries of base metals such as automobile, infrastructure, electricals and equipment manufacturing are likely to register steady demand growth, while demand from real estate sector would decline. Industry participants are likely to generate higher free cash flow, driven by higher average metal prices and an increase in available capacity,” it added.