Domestic non-ferrous metal companies are likely to post improved business returns in FY18 compared to FY17 with current buoyancy in metal sales realisation expected to hold steady during the remaining part of the year, ICRA research has said. Prices strengthened in the last five months of FY17 and fluctuated within a narrow band around the peak levels in Q1 FY18. Consequently, on a quarterly basis, primary metal manufacturers had progressively registered an improvement in operating margins, with Q4 FY17 being the most favourable since the crash in international metal prices in FY16.
“With input costs largely remaining under check, we can expect entities to register similar profitability in FY2018 as witnessed in Q4 of the previous financial year, provided currency rates remain supportive,” Jayanta Roy, Senior Vice-President, Corporate Sector Ratings, ICRA said.
On the demand-supply front, consumption trend of the three key non-ferrous metals viz. aluminium, copper and zinc, registered a wide variability in FY17, with aluminium consumption growing by a healthy rate of around 7%, zinc by a marginal 0.6% and copper witnessing a de-growth of around 6%. However, during Q4 FY17, consumption growth was negative for all the three metals as per ICRA estimates. It coincided with a period when domestic production in all the three metals grew at a steady rate, there was a large domestic surplus, which was mostly exported.
Going forward, while consumption is expected to improve in the current financial year, surplus availability will persist, as domestic capacity is high and manufacturers are expected to operate the plants at a high asset utilisation level. This would lead to buoyant export volumes. Increasing exports, however, would have an impact on margins, as typically export realisations are at a discount compared to domestic remunerations, which enjoy some duty protection. Additionally, Indian metal exports are largely in their ingot form, which have a lower margin as compared to value-added products that are sold in the domestic market.
Globally the demand for aluminium and zinc in CY2017 is expected to overshoot supply. For copper, demand – supply is expected to remain in balance. Hence off-take risks of domestic exporters for all non-ferrous metals would remain limited. ICRA expects the deficit in the global aluminium market to widen in CY2017 as a result of at least 2 million metric tonne of production cutbacks in China, due to the recent regulatory developments in the country. On the other hand, the deficit in the zinc market is expected to remain at the level of CY2016, notwithstanding some improvement in supplies. Such deficits are likely to keep non-ferrous metal prices buoyant, despite the soft demand outlook for these metals internationally.