The onset of a downturn for the sector was witnessed in FY20 with a slowdown in the global automobiles sector and continuing US-China trade war, leading to a gradual decline in base metal prices. Acute demand disruptions led by the COVID-19 outbreak since mid-December 2019 has led to a sharp decline in realisations amid the oversupply in the market.
Average monthly realisations for aluminium, copper & zinc had reduced 17%-18% up to April 2020 from the pre-COVID levels in December 2019. As some of the economies resumed operations with the relaxation of lockdown norms, the realisations have picked up over the last two months by 6%-7% for aluminium and zinc and by 14% for copper in June 2020 in relation to April 2020. However, considering the weak sector fundamentals indicating an oversupply in the market, the improvement in realisations has largely been driven by sentiments and the prices are likely to remain subdued in the near term. Within the sector, Ind-Ra expects domestic aluminium prices to remain under pressure in FY21, on a weak end-user demand and surplus market supply, while zinc & copper prices are likely to have a strong floor at the current prices levels.
The domestic base metal industry is largely dominated by Vedanta Limited (‘IND AA-’/Negative), National Aluminium Company Limited (‘IND AAA’/Stable), Hindustan Zinc Limited (‘IND A1+’), Hindalco Industries Limited and Hindustan Copper Limited. Each player is either a leading or among the top-three industry leaders in its specialised base metal category in the domestic market.
Though the COVID-19 outbreak had weighed down on the players’ 4QFY20 operational performance, their credit metrics have remained resilient due to their low leveraged balance sheet and low-cost industry position. Ind-Ra, however, expects the operations of sector companies to be severely impacted in FY21, led by a continuing subdued demand. While the revenues may decline at least 20% yoy, the absolute EBITDA could fall around 35% yoy. Though the utilisations levels are likely to be high, the operating margins will be subdued due to a high share of export market sales in the revenue mix and low physical premiums. However, with adequate liquidity position, strong financial flexibility, low-cost position and dominant market share, Ind-Ra believes the leading industry players would overcome the challenges posed by the current testing times and shall emerge stronger with various sustainable cost-cutting measures undertaken.