Ind-Ra Revises Non-Ferrous Mining & Metals Sector's Outlook to Stable

India Ratings and Research (Ind-Ra) has revised the Outlook on the non-ferrous metals and mining sector to Stable for FY16 from 'Stable to Negative'. Also, it has maintained a Stable rating Outlook on sector companies for FY16. The agency believes that in the absence of major market disruptions such as a rise in US interest rate or a hard landing in China, most base metal prices are close to the bottom. The agency expects industry players to sustain realisations and operating profits driven by a steady physical premium. Physical premiums on non-ferrous metals over broad market prices such as London Metal Exchange are likely to remain steady given the oligopolistic nature of the non-ferrous metals market in India.

The agency does not expect the low aluminium price levels of sub USD1,689/ton observed in 2014 to be revisited in FY16. However, price levels above USD1,900/ton may not be sustained for long, given the global over supply situation and higher inventories. The agency expects London Metal Exchange prices to continue to increase in FY16. Domestically, the metal price realisation is expected to improve on a pick-up in investments in key end-industries such as automobiles, packaging, power and construction towards 2HFY16. On-going coal blocks auctions would substantially determine the direction of profitability as major players own captive power plants.

On copper, Ind-Ra expects oversupply risk in concentrates to magnify in the near term. Reduced demand growth from China and high levels of inventory being tied to financing deals will keep the metal prices under check in FY16. Indian copper metal and mining companies are likely to benefit from a concentrates surplus and thus robust treatment and refining charges in FY16.

Integrated zinc producers will take advantage of the likelihood of a deficit in the international market as some large mines progress on their planned closure. Domestic metal demand growth is likely to be buoyed by growth in steel production. Demand growth for steel is estimated to be 5.5%-6.0% in FY16 compared with 1.3% yoy in 8MFY15. As expected by the agency, zinc prices remained strong in 2014 with a favourable demand-supply situation.

Outlook Sensitivities

Chinese Economic Activity: Metal prices depend substantially on Chinese economic activity. China accounts for 40%-50% of the global consumption of aluminium, copper and zinc metals. Latest leading economic indicators are not encouraging with a weak output and low order growth rates. Fitch Ratings Ltd does not expect any meaningful recovery in real estate construction activity in China in 2015. As such, it expects reduced demand growth for metals. A further economic slowdown in China will cause a sustained long-term correction in metal prices.

Rupee Volatility: The agency has assumed the rupee-dollar levels to hover at about INR63/USD. However, if currency levels were to strengthen to INR60/USD or below, it could negatively impact the operating margins of sector companies.

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