Non-ferrous metal prices saw significant headwinds in the second quarter of 2022 due to a slowdown in demand in China and tighter monetary policy in major global economies, eclipsing the supply constraints. While international aluminum prices have corrected by around 40% from a record high of around USD 3,900/tonne set in March 2022, copper and zinc prices have also moderated by around 30% each from their respective highs. On the other hand, electricity costs have increased significantly for domestic base metal companies, due to less availability of tie coal to non-power sectors and high coal prices in international and domestic markets.
According to ICRA, the national e-auction premium on coal increased by more than 400% in May 2022, which negatively impacted the cost structure of base metal companies and, therefore, the margins.
Going forward, given the difficulties in coal supply during the current monsoon season, the rating agency expects domestic coal prices to also remain high in the current quarter.
Elaborating further on industry profitability, Jayanta Roy, Senior Vice President and Group Head, Corporate Sector Ratings, ICRA, said: has been revised down to 22% for FY2023, or nearly 400 basis points lower than our previous estimates and 600 basis points lower compared to fiscal 2022. The high cost of coal remains a near-term concern. The outlook for the industry has therefore been revised from positive to stable”.
Despite weaker profitability expected for FY2023, earnings are expected to be supported by favorable domestic demand growth of 5-6%, given the government’s focus on infrastructure development. On the balance sheet front, the total indebtedness of the ICRA sample has been reduced to ₹610 billion in FY2022 from Rs. 700 billion in FY2020 and Rs. ₹ in fiscal 2021. Total debt is expected to decline further in fiscal 2023. Therefore, despite an expected moderation in profitability, credit metrics would remain comfortable in fiscal 2023 with debt total debt/OPBDITA estimated of 1.6 times and interest coverage of 7.0 times, compared to total debt/OPBDITA of 1.1 times and interest expense coverage of 10.0 times during the financial year 2022.
Considering the good performance of the previous two fiscal years, domestic players announced capital expenditure plans of around $10 billion, which would be executed over the next 5-6 years. Despite these significant expansion plans and a moderation in near-term industry earnings, given the deleveraging that has occurred, the base metals industry is now more resilient to withstand project risk. , the rating agency said.
Globally, the apparent consumption of base metals was affected in the first half of 2022, due to an estimated contraction in demand in China during the second quarter of 2022 amid tighter lockdowns in various regions. Chinese exports have recovered significantly in recent months to register growth of around 35% in the first half of CY2022 to offset the slowdown in their domestic market. However, a tightening of monetary policy in major non-ferrous metal consuming economies other than China is expected to keep global demand growth subdued in CY 2022.
“While the slowdown in demand will loosen the balance of metals to some extent, the deficit situation is expected to persist for aluminum and zinc during AC 2022. The global copper market is expected to remain in surplus in CY2022. Global aluminum supply is expected to remain tight due to production cuts in China and Europe and lower production in Russia amid geopolitical tensions. have already been announced by major European producers due to high energy prices in the region.While the probable deficit situation of aluminum and zinc would support base metal prices in the medium term, increased fears of Weakening global demand would keep major base metal prices under pressure in the near term,” Roy reiterated.
Source: Living Mint