ICRA : Domestic base metal companies to benefit from buoyant metal prices; outlook remains positive

Post a sharp improvement in FY2022, the credit profile of the domestic non-ferrous metal players is expected to remain healthy in FY2023 driven by supportive base metal prices. The buoyancy in metal prices is expected to outweigh input cost pressures, which will support the profitability of domestic base metal companies in FY2023.

Given the strong performance, the credit metrics of the companies in ICRA’s sample set, notwithstanding minor moderations, are also expected to remain healthy, with a projected total debt/OPBDITA of 1.6 times and interest cover of 8.0 times during FY2023 compared to a total debt/ OPBDITA of 1.3 times and interest cover of 9.0 times estimated in FY2022. International prices of base metals have been up sequentially by ~3-18% during Q4 FY2022 compared to the previous quarter and are expected to remain elevated in the first half of FY2023, owing to supply-side constraints in the near term.

Elaborating further on the industry situation, Jayanta Roy, Senior Vice-President and Group Head, Corporate Sector Ratings, ICRA said, “The continued earnings surge in the next 12 months on the back of buoyant metal prices in FY2023 and deleveraging of balance sheets will result in a further improvement in the domestic industry’s risk profile. Consequently, the industry outlook remains positive in our view. As for the international base metal prices, while the downside risks to prices, particularly in the second half of FY2023, cannot be ruled out, depleting inventories would limit any sharp price corrections during this period. Aluminium prices have already risen by ~15% in March 2022 compared to January 2022, fuelled by rising geo-political risks amid the ongoing Russia-Ukraine war and elevated power costs in the European countries.”

As for the current domestic demand-supply scenario, the demand for base metals registered a healthy growth of 10-15% in 10M FY2022, aided largely by an improvement in demand from end-user industries and partly by a low base effect. The capacity utilisation for aluminium and zinc metals also remained healthy at 80-90% in FY2022, resulting in large export volumes. Off-take risks in the international market remain low, given the cost competitiveness of the domestic manufacturers and the recent production cuts in China. However, lower copper production has created a large deficit in the domestic copper market, resulting in large imports, and the situation is unlikely to improve in the near term.

In CY2021, the global demand (ex-China) of base metals increased at a faster rate of ~7-10%, owing to significant recovery, post pandemic. In China, the growth remained moderate at 2-5% for aluminium and zinc, while in copper there was a contraction in apparent consumption. “The demand-supply situation for base metals either remained balanced or in deficit in CY2021. In CY2022, the deficit situation is expected to persist for aluminium and zinc owing to supply cuts, while in the case of copper, higher mine production is likely to result in a surplus situation in the second half. The tight supply situation augurs well for base metal prices in the coming quarters,” added Mr. Roy.