India Ratings & Research (Ind-Ra) has assigned a stable to negative outlook on the mining and metals (non-ferrous) sector for FY15.
While, the rating outlook for mining and metal companies remains stable on expectations of stable margins. This is partly because these companies are able to charge a physical premium, given the oligopolistic nature of the metals and mining market in India. Moreover, if the Indian rupee continues to remain at the current Rs 62/USD level it will likely provide some cushion to the players; however, if currency levels were to strengthen to Rs 60/USD or below, it could negatively impact the margins of larger players. Ind-Ra has already factored such risks into the ratings of its rated industry players.
In case of Aluminium, about 2 million tonnes (mt) of high-cost smelting capacity has closed down globally in the last 12 months and this is likely to continue for some time. However, 3.2mt-3.8mt of capacity, more efficiently placed on the cost curve, is likely to come up. Thus, the global over supply situation is unlikely to correct in the short term. The current price of aluminium in the range of USD1,700/t to USD 1,780/t is estimated to be representative of producers in the range of 75th to 85th percentile on the cost curve. The net incremental capacity addition being more cost efficient may prevent the prices from exceeding USD 1,800/t. Potentially the global aluminium cost curve may recalibrate marginally downward.
Ind-Ra expects operating profitability of domestic players to remain challenged due to cost inflation and lower physical premiums in FY15, though a weak rupee could offset the decline partly. Cost inflation expectation is backed by inflation in coal and furnace oil prices. Bauxite availability is likely to be strained and could pressurise the operating margins of non-integrated players in FY15.
The key sectors driving aluminium growth, such as construction, power automobiles and packaging are unlikely to generate robust demand in FY15. Aluminium production and consumption declined 5% yoy and 4% yoy, respectively, in the trailing 12 months (ttm) ended October 2013.
In case of Copper, the agency anticipates a global oversupply risk, to persist in the near term in 2013. Reduced demand from China in 2013 and historically high systemic inventory levels of the metal will keep its price supressed. However, an uptick in demand from the US and Europe could support its price above the current level.
Indian players are likely to benefit from a surplus in concentrates in China and consequent stable treatment charges and refining charges (TCRC) in FY15. Integrated players such as Hindustan Copper Ltd. are better placed currently, as India is largely dependent on imported ore. To the extent currency and global copper prices exhibit limited volatility, even custom smelters, who are typically non-integrated, are expected to benefit.
In case of Zinc, Integrated zinc producers will benefit as China is likely to remain a net importer of the metal along with continuous uptick in demand from the US. Global supply surplus substantially reduced for the 10 months ended October 2013. Domestic producers, being net exports, will benefit if there is any supply-side disruption including a fall in mining output or closure of smelting capacity resulting in a strong surge in the metal prices.
