In a recent note on the Indian primary base metal industry, ICRA said that the earnings of the industry would remain under pressure in FY2024, after a lacklustre performance in the last fiscal. Significant metal price corrections remain the key headwind affecting the margins, with no immediate relief in sight. The moderation in earnings, combined with the committed expansion plans of the players, is expected to increase the industry’s leverage in FY2024. However, the debt protection metrics remain adequate in the base case scenario and, therefore, ICRA maintains a Stable outlook on the sector.
International prices of the three non-ferrous metals viz. aluminium, copper and zinc witnessed corrections of 11%, 8% and 30% respectively in the last six months, owing to global macroeconomic uncertainties and weaker-than-earlier expected recovery in Chinese demand. While the calendar year commenced with a recovery in metal prices in January 2023 following the lifting of lockdowns in China, the rally was short-lived as metal prices plummeted again in subsequent months, due to an uncertainty over the strength of China’s recovery. Global consumption growth of these metals registered a slowdown in H1 CY2023 and, going forward, growth is expected to remain muted in the current calendar year as well. In recent months, the regional premia across markets also remained subdued owing to bearish macro-economic sentiments.
Commenting on the global metal supply and price outlook, Mr. Jayanta Roy, Senior Vice-President and Group Head, Corporate Sector Ratings, ICRA, said: “Weak macro-economic outlook impacting global demand has so far weighed on non-ferrous metal prices. In addition, global metal supply shows signs of improvement, primarily in China, which is likely to result in a surplus metal balance for CY2023. Consequently, non ferrous metal prices are expected to remain under pressure in the near term at least, and any improvement would hinge on a stronger recovery in Chinese demand and improvement in global sentiments”.
In the domestic market, however, the demand remains resilient and Government’s capital expenditure (capex) drive is expected to support domestic non-ferrous metal consumption growth at ~9% in FY2024, after growing at a healthy rate of ~12% in FY2023. In addition, the moderation in coal costs, if sustained, is expected to alleviate input cost pressures to an extent. ICRA notes that the domestic e-auction premia on coal have eased in recent months at ~78% in May 2023 from the exorbitant levels of >400% seen in the corresponding period of previous year. Nonetheless, industry profitability is expected to remain under pressure in FY2024 with significant correction in metal prices in recent months. ICRA believes that price will remain range-bound at current levels in the near term.
Elaborating further on the industry profitability, Mr Roy said: “Given the steep corrections in prices of base metals, we have revised our estimates of operating profitability of domestic players downwards to 17% in FY2024, almost 300 basis points (bps) lower compared to our earlier forecasts made in March 2023, and 150 bps lower compared to the margin achieved in FY2023”.
 Average of aluminium, copper and zinc consumption