Weak fundamentals remain a drag on metal, mining cos: Report

Amid high volatility, metal and mining companies will find it difficult to prepare plans for the future as weak fundamentals and dim economic outlook pose challenges in the long-term for the sector, says a report.
However, the report on volatility and financial risks in metals, prepared by Ernst and Young (E&Y) for the Indian Chamber of Commerce, suggests that metal and mining companies should learn to adapt to changes as their peers in the oil & gas and power sectors have done.
It said that volatility has been "increasingly challenging" for firms looking to develop long-term plans.
"Volatility is not a new phenomenon that the mining and metal industry has to deal with. The awareness and adaptation by the industry had long begun, with a varying degree among its constituents, but the rapid and frequent changes are a new normal," the report said.

With weak fundamentals along with a dim economic outlook, the long-term outlook for the sector is volatile, leading to the possibility of substantial revisions to long term metal price forecasts and making it hard for mining and metal companies to plan for the future, the report added.
High volatility impacts costs and realisations, earnings and cash flows of producers, consumers and stakeholders, the report said adding that it leads to uncertainty in meeting expectations and creates ambiguity in response strategies.

"Fortunately, there are several other industries (oil and gas, power and agriculture) dealing with underlying risk assets or commodities that may have more evolved approaches and tools to manage such financial risks.

"It is necessary for players in the mining and metals industry to learn from such industries and adapt to change," the report suggested.
Market players in aluminium, copper and gold seem to be a few steps ahead in terms of market development, it said.
E&Y Partner (Advisory Services) Hemal Shah said: "Metals sector needs to adopt the evolving practices of price risk management, with price discovery, reliability, acceptability and transparency being the immediate priority for all stakeholders in the value chain."
Recent volatility in key prices of iron ore, coking coal and other raw materials has made margin forecast difficult for players in metals industry.

With an increased focus on specialised products to enhance realisations, a lot needs to be done to smoothen input pricing structures and mill margins, he added.
On the steel sector, he said the industry needs solutions on asynchronous price movements in raw material prices as that is very critical in controlling the margin impact.
It also needs to draw a parallel from peer industries and creating a holistic framework across the entire value chain in order to curtail volatility and implement risk mitigation strategies suitable for the inherent business dynamics, he added.