Healthy demand and tight inventories to support base metal prices in CY2022; credit profile of domestic players to remain comfortable: ICRA

13 Jan 2022 , 02:23 PM

The prices of non-ferrous metal remained buoyant in CY2021 on the back of steady improvement in demand and supply-side constraints. International prices of base metals were up by ~33-54%[1] during 11M CY2021 compared to the corresponding period of previous year, supported by deficit/or balanced demand-supply and tight inventory situation in the global market. The price buoyancy is expected to continue in CY2022, even as downside price risks, including that from the rising spread of the Omicron variant globally, cannot be ruled out, low visible inventories and steady demand may insulate against any sharp price corrections. Consequently, absolute price levels would remain at a comfortable level for the domestic non-ferrous metals industry in ICRA’s opinion.

Globally, while the demand-supply for aluminium and zinc was at a deficit in 9M CY2021, the copper market remained in balance during the same period. In CY2022, the supply of copper is expected to improve with increased availability of concentrates, on the back of commissioning of several new mine projects. The aluminium market, however, will remain tight owing to production cuts in China and no significant capacity additions in the near term, in the rest of the world. The zinc market is also expected to remain in deficit after a production cut announced by a few European smelters in October 2021, owing to increasing energy costs.

However, downside risks on prices from such high levels at present cannot be ruled out over the short term, with the gradual withdrawal of liquidity support extended by various Central banks during the pandemic period. Risks could also be accentuated by a rapid spread of the Omicron variant globally.

As for the domestic situation, Mr Jayanta Roy, Senior Vice-President and Group Head, Corporate Sector Ratings, ICRA said, “The domestic consumption of base metals has witnessed a healthy growth of ~20-25% in 6M FY2022, owing to a low base of the previous fiscal and an improvement in demand from end-user industries. We expect the demand of base metals to register a healthy growth of 6-7% in FY2022 and FY2023. This, coupled with favourable metal prices, the consolidated operating margins are estimated to remain strong at ~29% in FY2022 compared to ~24% in FY2021 and are likely to hover at about 25% in FY2023, despite an expected moderation in prices.”

The total indebtedness of ICRA’s sample set in the domestic non-ferrous metals is expected to improve/decrease to ~Rs 580 billion in FY2022 from ~Rs. 650 billion in FY2021 and is expected to reduce further in FY2023. As on September 30, 2021, the total debt has already reduced to ~Rs 615 billion. Buoyant metal prices provide an opportunity to the industry now to deleverage the balance sheets before the next commodity downcycle kicks in.

“The favourable price-cost regime would continue to result in a steady improvement in the credit risk profile of the domestic non-ferrous industry in FY2022. In FY2023, despite a moderation in metal prices, the credit metrics would continue to remain healthy at an absolute level with a projected total Debt/OPBDITA of 1.4 times and an interest cover of 7.5 times compared to a total Debt/ OPBDITA of 1.2 times and an interest cover of 9.0 times in FY2022,” Mr. Roy added.