The overall financials of the domestic copper industry may take a hit owing to margin pressure and a subdued global outlook.
According to a report by 'Care Ratings', the dip in domestic production, largely due to the permanent closure of Vedanta's copper smelter plant in Thoothukkudi, will force India to remain a net importer of copper while the global copper prices will remain suppressed, and in the range of $ 5,500-5,900/tonne, until a constructive trade deal is reached between the US and China.
Cumulative sales revenue of India's copper industry has declined by 6.6 per cent during the period from FY15 to FY19. The industry's revenues largely depend on the copper prices prevailing in the global economy. However, LME copper prices started declining and have been supressed ever since the US-China trade war began, the report says.
Domestically, production of refined copper had grown at a CAGR of 9.6 per cent during FY14-18. Production fell by 46.1 per cent during FY19 due to the permanent closure of Sterlite’s 400KT copper PLANT in Thoothukudi on May 28, 2018. The Thoothukkudi PLANT accounts for 40 per cent of the country’s copper smelting capacity.
With the permanent closure of Sterlite's smelter in Thoothukkudi, and the uncertainty surrounding its remission, the rating agency believes that by the end of FY20, refined copper production will be around 450 kiloton (KT), registering a 1.5 per cent drop from its FY19 level of production. Production of copper from April to July this year was at 167 KT.
"The closure of this plant has resulted in India becoming a net importer, from a net exporter of copper. Due to the increase in demand, India will continue being a net importer of refined copper during FY20 as well, unless the Madurai court passes the judgement for the remission of the this smelter," the rating agency said. India has become a net importer of refined copper after 18 years.
According to the report, during FY19, exports had fallen by 87.4 per cent, (during FY18 exports had increased by 12.3 per cent) whereas imports increased by 131.2 per cent (during FY18 imports had increased by 35.6 per cent). As a result, imports of copper cathodes have increased by 82.6 per cent and exports have fallen by 72.7 per cent.
Consequently, domestic copper companies have seen a fall in revenues by 32.1 per cent during FY19 on a year-on-year (YoY) basis. Even in the current financial year, revenues have dropped by 17.3 per cent.
On the revenue front, the profitability of Indian copper companies largely depends on the Treatment Charges and Refinery Charges (TC/RC). The TC/RC is the fees smelters charge miners for processing the concentrates and are designed to cover refining costs. However, these margins are expected to remain under pressure.
"We expect TC/RC margins to remain under pressure owing to the supply side disruptions from the major mining areas
(Chile mining strike). This could act as a double whammy for copper manufacturers given global copper prices are already low and low TC/RC margins will affect smelters' earning capacity, potentially affecting the overall financials of the copper industry," the report said.
"Operating profits largely depend on the TC/RC margins. Higher TC/C margins are favourable to companies as it increases their profitability. Mine strikes and shortages/unavailability of copper concentrates has resulted in the fall of the TC/RC margins in the last few years which has resulted in suppressing the margins of copper manufacturers as well," it said.