Ind-Ra maintains stable outlook for the Base Metal Sector


Credit Ratings Agency India Ratings and Research (Ind-Ra) has maintained a stable outlook on the base metals sector for the 2nd half of the current financial year. Within the sector, aluminum prices are expected to largely hold firm at the current high levels on the back of a net global deficit (ex-China), whereas zinc prices are likely to face downward pressure with the gradual commissioning of new capacities and resumption of idled mining capacities.

The impact of the protectionist measures undertaken by various countries on the global trade in the wake of growing US trade restrictive measures, China’s consumption growth and China’s supply discipline will play a pivotal role in defining global demand-supply dynamics and price levels in 2HFY19.

China’s supply discipline led by environment concerns will continue to impact aluminum exports out of the country, resulting in a continued global deficit. This, coupled with a further escalation of global trade war, may lead to a tightly balanced demand-supply equilibrium, which could support the prices in the near term. Domestic demand for aluminum improved during 1HFY19 in line with Ind-Ra’s expectations and is likely to continue to improve during 2HFY19 as well, driven by a rise in government spending on improving power transmission and distribution infrastructure in the country. Even as the demand improves, the domestic aluminum market will continue to face competition from continuing imports under free-trade agreements. The competition from imports is likely to intensify as the protectionist measures undertaken by the US will redirect Chinese output to the rest of the world.

After rising to the peak of over USD7,000/tonne during 1QFY19, partly on the back of speculations of labour unrest at some of the key mines, copper prices dropped to about USD6,300/tonne on LME. Ind-Ra expects the prices to hold firm through 2HFY19 in the band of USD6,000-6,500/tonne. In the domestic market, premiums and imports have gone up in the last three months post production stoppage at Vedanta Limited’s Tuticorin plant. Hindalco Ltd, Hindusthan Copper Ltd and importers are likely to continue to benefit until the operations resume at the Tuticorin plant.

Zinc prices have started to come down at a higher-than-expected pace during FY19, after rising steadily in FY17 and FY18 due to a shortage in supply. Ind-Ra expects further tapering of zinc prices during 2HFY19. This will be primarily driven by a gradual rise in zinc supply following new capacity additions as well as resumption of mining activities at mines that have been idled since 2015. Domestic zinc consumption is likely to remain firm, with a strong demand from key end-user industries such as automobile and construction.


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