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The primary non-ferrous metal industry is expected to see significant headwind in H1FY23 due to challenging operating environment following sharp metal price corrections and higher coal costs in the current fiscal, according to rating agency ICRA. However, the rating agency expects some respite in H2FY23 for the domestic non-ferrous metal companies.
Price Correction
Prices of base metals have fallen by 25-40% till date in FY23 in the international market, compared to the record high prices in March 2022 due to various macro-economic concerns, ICRA said in the report.
Lower Chinese demand and tightening of monetary policy by major global central banks is likely to impact global non-ferrous metal demand in 2022 and weigh on the metal prices. The Gross Domestic Product (GDP) and Purchasing Managers Index (PMI) data of major global economies in the most recent quarter also reflect concerns over global economic growth.
“The metals balance is likely to remain in deficit owing to production cut for aluminium and zinc in Europe, amid higher energy prices in the region,” said Jayanta Roy, Senior Vice-President and Group Head, Corporate Sector Ratings, ICRA.
He added that the copper supply was also hit in Q2 of CY2022 owing to prolonged protests in large mines of Peru. Roy expects metal prices to remain range bound in coming quarters.
High Power Cost
Power cost for domestic base metal companies have significantly increased owing to the lower availability of coal linkages to non-power sectors and elevated coal prices in both domestic e-auction and the international markets. ICRA noted that the domestic e-auction premia on coal remained high at around 300%. Consequently, the profitability of domestic non-ferrous entities would be impacted, primarily for power intensive metals viz. aluminium and zinc due to higher coal prices.
Financial Outlook
Non-ferrous metal industry is expected to see healthy domestic demand at 5-6% in the current fiscal year as the Indian Government pushes for infrastructure development and also aided by an uptick in real estate industry.
Moreover, domestic companies’ total indebtedness has declined to Rs 610 billion in FY2022, from Rs 640 billion in FY2021 and Rs 700 billion in FY2020.
The rating agency noted that the credit metrics of primary base metal producers would continue to be comfortable despite a likely moderation in profitability. Further, the industry debt to OPBDITA (Operating Profit Before Depreciation, Interest, Tax and Amortization) is likely to increase to 1.7 times in FY23 from 1.1 times in FY22, it will be still less than the pre-Covid levels of 3.6 times in FY20.
“Owing to the twin onslaught of corrections in metal prices and continued high coal prices, the estimated operating profitability of domestic players is likely to contract by 600-700 bps in FY2023 after a weak performance in Q1 FY2023,” Roy reiterated.
The elevated cost of coal remains a concern in the near-term and ICRA had revised the outlook of the base metal industry to Stable from Positive in July 2022 owing to the expected decline in profitability.
Stocks To Watch
Some of the companies present in the non-ferrous metal industry are as follows: Vedanta, Hindustan Zinc, Hindalco, NALCO, Hind Copper, Tinplate, Maithan Alloys, Gravita India, Precision Wires, Ram Ratna Wires and Arfin India.