Macro-economic uncertainties as well as weaker sentiments due to on-going trade wars have led to slowdowns in global consumption growths of aluminium and copper at ~1.1% and ~0.5% respectively during H1 CY2019, from the ~4.0% and ~2.3% growth registered in CY2018. While consumption growth of zinc at ~0.2% was a turnaround from the de-growth registered in the last calendar year, the overall trend in demand remains largely flat. As per ICRA note, despite muted consumption levels, the markets of the three key non-ferrous metals continued to remain in deficits in this period, with shortages in fact expanding on a yoy basis, as production growth rates were even lower than the growth in demand. The slowdown in production growth of aluminium and copper was in turn a result of capacity constraints, which is unlikely to improve significantly in CY2019. Production of zinc is likely to improve in the second half of the year, which may bring the market back into a balance.
Jayanta Roy, Senior Vice-President and Group Head, Corporate Sector Ratings, ICRA said: “Non-remunerative prices, coupled with supply side disruptions as well as capacity constraints have impacted non-ferrous metal production globally. As prevailing level of prices disincentivize new capacities coming online, the supply side pressures are likely to continue in the near term.”
International prices of the three non-ferrous metals viz. aluminium, copper and zinc are trading near their two-year lows for the last three to four months, primarily due to macroeconomic uncertainties on the back of ongoing trade wars and other country-specific factors. However, the fundamental supply-demand balance has kept prices range-bound. The deficits in the different base metals are likely to support prices, notwithstanding temporary fluctuations, typical of any internationally traded commodities.
The global aluminium market has remained at a deficit, varying from ~0.07 to ~1.01 million metric tonnes (MMT) for the last nine quarters, because of capacity cutbacks in China. While aluminium production in the country started increasing in the second half of the last calendar year, a further shut down of some loss-making capacities resulted in production de-growth from March to June 2019. No meaningful improvement in the supply scenario is envisaged in the near term as the idled capacities are unlikely to resume production at the current subdued price levels. Moreover, the total capacity of fresh aluminium smelters to be commissioned globally in CY2019 is also limited.
The copper and zinc markets have also remained in deficits in the last five quarters. The period of deficits in the international copper market coincides with the closure of 0.4 MMT copper plant of Vedanta in Tuticorin, indicating the impact of the closure on global copper supply. “Global copper deficit during April 2018 to March 2019 was ~0.6 MMT indicating that the Tuticorin smelter closure contributed around 66% to the global copper deficit”, Mr Roy added.
The impact of the shutdown of Vedanta’s copper complex has resulted in a shortage of copper in India. The deficit in copper, which was at ~39% of consumption, is likely to expand to ~43-45% in FY20. Consequently, India turned into a net importer of refined copper in FY19 from being a net exporter till FY2018. The country, however, remains a net exporter of aluminium and zinc as domestic capacities are higher than demand, and manufacturers operate the plants at high asset utilisation levels.
As per ICRA, domestic demand for non-ferrous metals in FY20 is likely to be impacted by the slowdown in the automobile and construction sectors. Consequently, consumption growths of aluminium, copper and zinc are likely to be muted at 3-5%, which is a slowdown from our earlier expectations of ~6-7% growth rates.