Corporates www.indiaratings.co.in 16 April 2015 Non Ferrous FY16 Outlook: Non-ferrous Metals Physical Premiums to Cushion Margins Against Uncertain Global Recovery and US Rate Hike Outlook Report Key Rating Drivers Stable Outlook: 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. Physical premiums to broad market prices such as London Metal Exchange (LME) may remain substantial due to the oligopolistic nature of the non-ferrous metals market in India. However, physical premiums may fall somewhat from the levels observed in 2014. Thus, despite a fall in global commodity prices, the agency expects industry players to sustain realisations and operating profits. MMRD (Amendment) Ordinance 2015 has also cleared the air on the renewal of existing concessions, royalty sharing and allocation of new concessions. Non-Integrated players will benefit from auctions being made the sole method of allocation of concessions with removal of state discretion. Aluminium to Stabilise: The agency does not expect the low aluminium price levels of sub USD1,689/ton observed in 2014 to be revisited in FY16. On the other hand, the price levels above USD1,900/ton may not be sustained for long, given global oversupply and high inventory levels. The agency expects LME prices to increase at a moderate pace in FY16. Ind-Ra expects the global aluminium demand to stabilise, around current level, with a positive bias. Regional physical premiums are likely to remain stable in FY16. The demand-supply situation of the physical metal outside China is fairly tight. Domestically, metal price realisation may improve in 2HFY16, buoyed by a pick-up in volumes for industries such as automobiles, packaging, power and construction. However, 1HFY16 may exhibit some pressure on physical premium. Aluminium Margins to Remain Stable: Ind-Ra expects the operating profitability of domestic aluminium players to remain stable in FY16. The agency expects the rupee-dollar exchange rate to marginally weaken and hover around INR63/USD, helping export sales realisation. The on-going coal blocks auctions would substantially determine the direction of profitability, given as major players have captive power plants. Stable Copper Realisations: Ind-Ra expects concentrates oversupply risk to magnify in the near term. Reduced demand growth from China and high levels of inventory tied to financing deals will keep the metal prices under check in FY16. Hence domestically, the positive impact of the concentrated nature of the market and likely pick-up in demand will be countered by weak LME prices. The agency expects realisations and operating profitability to remain stable. Robust TCRC Income: Indian copper metal and mining companies may see robust treatment and refining charges (TCRC) in FY16 resulting from a surplus in concentrates in the international market. Non-integrated players could benefit from strong TCRC led by increases in supplies from both green and brownfield expansions globally. Assuming limited volatility in rupee-dollar exchange rates, higher operating levels would compensate the likely pressure from cost inflation coming from power costs, as was seen in FY15. Sector Outlook S TABLE (2014: S TABLE T O N EGATIVE ) AL and Zn Prices May Creep Upward Recovery in Domestic Demand during 2HFY16 Steady Physical Premiums Steady TCRC Margins Amid Surplus Cu Concentrates Rating Outlook S TABLE (2014: S TABLE ) Related Research Other Outlooks www.indiaratings.co.in/outlooks Other Research 2014 Outlook: Steel Producers Analysts Mahaveer Jain S +91 22 4000 1768 [email protected]Deep N Mukherjee +91 22 4000 1721 [email protected]
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Corporates
www.indiaratings.co.in 16 April 2015
Non Ferrous
FY16 Outlook: Non-ferrous Metals Physical Premiums to Cushion Margins Against Uncertain Global Recovery and US Rate Hike
Outlook Report
Key Rating Drivers
Stable Outlook: 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. Physical premiums to broad
market prices such as London Metal Exchange (LME) may remain substantial due to the
oligopolistic nature of the non-ferrous metals market in India. However, physical premiums may
fall somewhat from the levels observed in 2014. Thus, despite a fall in global commodity prices,
the agency expects industry players to sustain realisations and operating profits.
MMRD (Amendment) Ordinance 2015 has also cleared the air on the renewal of existing
concessions, royalty sharing and allocation of new concessions. Non-Integrated players will
benefit from auctions being made the sole method of allocation of concessions with removal of
state discretion.
Aluminium to Stabilise: The agency does not expect the low aluminium price levels of sub
USD1,689/ton observed in 2014 to be revisited in FY16. On the other hand, the price levels
above USD1,900/ton may not be sustained for long, given global oversupply and high inventory
levels. The agency expects LME prices to increase at a moderate pace in FY16. Ind-Ra
expects the global aluminium demand to stabilise, around current level, with a positive bias.
Regional physical premiums are likely to remain stable in FY16. The demand-supply situation
of the physical metal outside China is fairly tight. Domestically, metal price realisation may
improve in 2HFY16, buoyed by a pick-up in volumes for industries such as automobiles,
packaging, power and construction. However, 1HFY16 may exhibit some pressure on physical
premium.
Aluminium Margins to Remain Stable: Ind-Ra expects the operating profitability of domestic
aluminium players to remain stable in FY16. The agency expects the rupee-dollar exchange
rate to marginally weaken and hover around INR63/USD, helping export sales realisation. The
on-going coal blocks auctions would substantially determine the direction of profitability, given
as major players have captive power plants.
Stable Copper Realisations: Ind-Ra expects concentrates oversupply risk to magnify in the
near term. Reduced demand growth from China and high levels of inventory tied to financing
deals will keep the metal prices under check in FY16. Hence domestically, the positive impact
of the concentrated nature of the market and likely pick-up in demand will be countered by
weak LME prices. The agency expects realisations and operating profitability to remain stable.
Robust TCRC Income: Indian copper metal and mining companies may see robust treatment
and refining charges (TCRC) in FY16 resulting from a surplus in concentrates in the
international market. Non-integrated players could benefit from strong TCRC led by increases
in supplies from both green and brownfield expansions globally. Assuming limited volatility in
rupee-dollar exchange rates, higher operating levels would compensate the likely pressure
from cost inflation coming from power costs, as was seen in FY15.
Zinc in Deficit: 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. Ind-Ra expects
domestic producers to generate better realisations on back of a robust outlook on LME prices,
while physical premiums are expected to remain stable. Domestic metal demand growth is
likely to be buoyed by growth in steel production. The agency expects the demand growth for
steel 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: A further economic slowdown in China will cause a sustained
long-term correction in metal prices and will lead to a negative sector outlook. A further
economic slowdown in China will cause a sustained long-term correction in metal prices. 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.
Rupee Volatility: If the currency levels were to strengthen to INR60/USD or below, it could
negatively impact the operating profitability of sector companies and result in a stable-to-
negative sector outlook.
Delay in Domestic Recovery: In the event of delays or a lower-than-expected recovery in
core sectors such as power, infrastructure, construction, capital goods and auto, the physical
premium of the metals may fall substantially below the 2014 levels, which may affect the
operating margins of sector companies.
Corporates
FY16 Outlook: Non-ferrous Metals
April 2015 3
Aluminium
Global Scenario
Fitch Ratings projects the primary aluminium price to continue to trend upwards in 2015 and
2016. Spot LME aluminium prices are expected to improve to USD1,900/ton in 2015 and 2016.
The global deluge of low-cost liquidity has significantly distorted the relationship between the
actual physical demand of the underlying metal and the directional trend of its traded price in
exchange such as LME. Thus, a significant amount of physical inventory remains with
exchange warehouses, since these are tied to financial transactions. This to an extent limits
supply to industrial consumers, giving rise to a high physical premium for lot of metals including
aluminium. Higher physical premiums continued to support production levels despite a fall in
aluminium prices from 2011 levels. In absence of such high premiums, a lot more production
capacity would have been curtailed.
Structural Features More Positive
The overcapacity situation prevalent in the industry has been addressed to an extent, since the
overcapacity has proportionately moderated over a period.
Long-term consumption trends are quite positive, reflecting rising per capita consumption in
emerging economies. However, longer-term price evolution for aluminium will largely be
determined by supply-side considerations such as the availability of key raw material inputs
such as bauxite and access to low-cost energy.
However, the substantial inventory and new capacities in China, India and Middle East will
continue to prevent increases in metal prices. In addition, the new efficient capacities being
built in China would calibrate downward the cost curve of the industry. Aluminium consumption
trend will remain positive with 2014 growth at 7.5% yoy.
Figure 1
Unwinding Financial Structure Can Crash Prices
Coinciding with the surge of low-cost global liquidity, LME inventory went up significantly post
January 2009. However, producer inventory, which has higher alignment with actual
consumption, has remained around historical levels with some downward bias.
0
2
4
6
8
10
0
10,000
20,000
30,000
40,000
50,000
60,000
2009 2010 2011 2012 2013 2014
Production (LHS) Consumption (LHS) Percentate surplus to consumption (RHS)
Global Primary Al Production & Consumption
(000t)
Source: Bloomberg
(%)
Physical premium is an amount paid over LME price for the physical delivery of a metal. This is mostly attributable to the costs incurred due to the cost of storage, transportation and insurance.
Current per capita aluminium consumption in China is around 13-15kg, 5kg in Brazil and 1-2kg in India, comparing peak levels of around 25kg per capita in Germany and Korea. Peak aluminium consumption typically occurs at a later stage in the industrialisation process than for steel, indicating significant scope for growth in aluminium demand.
Corporates
FY16 Outlook: Non-ferrous Metals
April 2015 4
Figure 2
Exchange inventory, a substantial proportion of which is connected with pure financial
investment transactions, may be at least partially liquidated if such financial structures are
unwound in the event of a global rise in cost of capital. LME inventory has been winding down
since March 2014 while producers‟ stocks have shown a marginal uptick.
Figure 3
The risk of significant unwinding of exchange inventory positions in response to the change in
global liquidity and cost of funds remains. Under such a scenario, the aluminium spot price may
fall below USD1,650/ton for a brief period. However, the agency believes that the downside risk
to the price is limited as the ruling price is close to all-in-cost of at least 30%-40% of the global
production.
Ind-Ra acknowledges that in a liquidity flush, world forward price is not often a great indicator of
future prices. However, according to the most recent futures-spot spread, which is in a
moderate contango, a wild swing in prices is not expected in the immediate future.
Domestic Scenario Demand Recovery
The agency expects domestic demand growth to moderately improve in 2HFY16. The key
sectors driving aluminium growth, such as automobiles, packaging, power and construction,
are likely to witness a moderate improvement in the later part of FY16. Export sales posted
strong growth of 22%, while domestic consumption declined by an estimated 13% yoy. The
domestic sales declined due to weak demand from core sectors. The demand of aluminium is
likely to exhibit a minor recovery in FY16 if there is an increase in government spending in
infrastructure and a revival of activities in the mining and power sectors.
0
1,000
2,000
3,000
4,000
5,000
6,000
Jan 08 Aug 08 Mar 09 Oct 09 May 10 Dec 10 Jul 11 Jan 12 Aug 12 Apr 13 Oct 13 Jun 14 Dec 14
Producer stocks LME stock
Primary Aluminium LME & Producer InventoryContinues to be at historical highs
(000mt)
Source: IAI,LME, Ind-Ra estimates
-60
-40
-20
0
20
40
60
0
500
1,000
1,500
2,000
2,500
3,000
Feb 10 Aug 10 Feb 11 Aug 11 Feb 12 Aug 12 Feb 13 Aug 13 Feb 14 Aug 14 Feb 15
Spot (LHS) Spread (3M futures-spot) (RHS)
Spread between Three MonthFutures and SpotBounce back to contango in early 2015
(USD/ton)
Source: Bloomberg
(USD)
Corporates
FY16 Outlook: Non-ferrous Metals
April 2015 5
Solid Physical Premiums
In India, aluminium metal is an oligopolistic market with Hindalco Industries Ltd. (Hindalco),
Sesa Sterlite Ltd. (SSL) and National Aluminium Company Ltd. (Nalco)) being the major
players and having strong pricing power. Physical premium surged to record highs of
USD350/t-USD450/t in 2014 from about USD250/t-USD350/t in 2013. In 1HFY16 however, the
physical premium are likely to moderate to 2013 levels, driven by weak demand as well as
pressure from imports. The premium is likely to improve in 2HFY16.
Figure 4
Sufficient Supplies
Hindalco has attained 50% utilisation at its new 360,000tpa smelting capacity at Mahan
Aluminium. Also, production at Utkal Alumina increased to about 64% in 2QFY15. Similarly,
SSL also started producing from its new 325,000tpa smelting capacity at Korba II in 1HFY15.
Both the new capacities put together account to 30%-35% of the increase in the current levels
of India‟s aluminium production. Moreover, SSL has total capacity addition plans of about
4mtpa at its Lanjigarh location. Most of the new capacity production would be sold in export
markets. Overall operating rates remain dependant on the de-bottlenecking of coal supply
chain.
During the trailing twelve months (TTM) October 2014, the combined production of Hindalco,
SSL and Nalco improved substantially by an estimated 9% yoy.
Bauxite Imports Trends Up
Of the three major aluminium producers, Hindalco and Nalco are fully integrated with
bauxite/alumina linkages. However, SSL largely depends on the outside purchase of inputs and
is thus subject to the price volatility of key raw materials. Bauxite and alumina prices inched up
during 1HFY15. Bauxite imports increased substantially during the same period, led by a higher
smelter available capacity and operating rates. Any increase in the alumina capacity utilisation
would weigh on alumina prices.
Figure 5 Figure 6
30
40
50
60
70
40
60
80
100
120
140
Jan 11 May 11 Oct 11 Mar 12 Aug 12 Dec 12 May 13 Oct 13 Mar 14 Aug 14 Dec 14
Indexed LME price (LHS) Indexed indian prices (LHS)
USD INR exchange rate (RHS)
Aluminium Price Trend-LME & India
(Index)
Source: Bloomberg, LME, Ind-Ra estimates
(INR/USD)
100
110
120
130
140
150
160
Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Dec 14
Al metal Alumina
India Al Metal and Alumina PriceTrends – Indexed
Source: Bloomberg, WBMS, 2004-2005=100
100
50,100
100,100
150,100
200,100
250,100
Jan 10 Dec 10 Dec 11 Nov 12 Nov 13 Nov 14
Import Bauxite Imports Alumina
India Bauxite and Anumina –Import Trends
Source: Bloomberg
(tons)
Corporates
FY16 Outlook: Non-ferrous Metals
April 2015 6
Stable Operating Profits
Ind-Ra expects FY16 realisations to be sustained in view of a recovery in demand and stable to
marginally upward LME metal prices under the assumption of continued availability of low-cost
global liquidity. The agency expects the rupee/dollar rate to trend up to INR63/USD in FY16.
While this is positive for integrated producers, the benefit would be offset for non-integrated
players by the increased cost of imported inputs. The impact of an increase in realisation on
operating margins is likely to be countered by higher energy costs, as was in FY15.
Realisations and operating profits improved in 9M14 despite higher energy costs. All of the
three largest players have captive power plants; however, the availability of domestic coal was
constrained and use of imported coal led to the increase in energy costs. The on-going coal
auctions would substantially determine the direction of profitability as the major players have
captive power plants.
Figure 7 Figure 8
Copper
Global Scenario
LME copper prices continued to fall to an average of USD6,840/ton in 2014 from USD7,335/ton
in 2013. The falling price reflects continued subdued import demand growth in China, which
accounts for 40% of the global consumption. On the supply side, the ramping-up of copper
supplies from new mines weighs on the prices despite a decline in the inventories.
Fears of Oversupply
Overall, the copper market is likely to be in a physical surplus for the coming two to three years.
Fitch Ratings see a downside risk to copper prices. While the demand-supply situation till 2014
was more evenly balanced for copper than for aluminium, there is an expectation of
oversupply.
Ind-Ra expects the prices to remain under pressure as the new mine supply will exceed the
rate of copper consumption by about 1.5% per annum. Majority of the new mine supply is
expected to come from Peru, Chile, Zambia, Panama and Mongolia. Also, copper demand
seems to trend down to a modest annual average growth rate of 5%-6% in three to five years.
International Copper Study Group expects the overall refined metal supply to grow at a rate of
4.3% yoy as opposed to the consumption growth rate of 1.1% yoy in 2015.
0
10,000
20,000
30,000
40,000
1Q
FY
13
2Q
FY
13
3Q
FY
13
4Q
FY
13
1Q
FY
14
2Q
FY
14
3Q
FY
14
4Q
FY
14
1Q
FY
15
2Q
FY
15
Hindalco Nalco Sterlite
Quarterly Sales of Top Producers
Source: Company results
(INRm)
0
4,000
8,000
12,000
16,000
2Q
FY
13
3Q
FY
13
4Q
FY
13
1Q
FY
14
2Q
FY
14
3Q
FY
14
4Q
FY
14
1Q
FY
15
2Q
FY
15
Hindalco Sterlite
Quarterly Operating Profit per ton
Source: Company results, Ind-Ra estimates- Indicative blended profitability per ton - Hindalco EBIT/ton & Sterlite EBITDA/ton
(INR)
Corporates
FY16 Outlook: Non-ferrous Metals
April 2015 7
Figure 9
Unwinding Financial Positions
As expected by the agency in the previous outlook, LME prices languished below the 2013
average prices due to high inventory levels and surplus production. This could result in
unwinding of the inventory tied to financial deals. The LME inventory has reduced significantly
since October 2013. However, the downside risk to prices remains in the event of a sharp
reduction in copper-based financial structures in response to a reduction in global liquidity.
Figure 10
Figure 11
The signals from futures market suggest a moderately strong contango with higher price risk.
-1
0
1
2
3
0
5,000
10,000
15,000
20,000
25,000
2009 2010 2011 2012 2013 2014
Production (LHS) Consumption (LHS) Percentate surplus to consumption (RHS)
Cu Metal Production & Consumption
(000mt)
Source: Bloomberg
(%)
2,000
4,000
6,000
8,000
10,000
0
400
800
1,200
1,600
Jan 08 Oct 08 Jun 09 Feb 10 Nov 10 Jul 11 Mar 12 Nov 12 Aug 13 Apr 14 Dec 14
Stock exchange inventory (LHS) Producers and other inventory (LHS)
Average monthly LME prices (RHS)
Cu Inventory and LME Price TrendOff from the peak
(000mt)
Source: Bloomberg
(USD/mt)
-200
-150
-100
-50
0
50
0
2,000
4,000
6,000
8,000
10,000
12,000
Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15
Last price (LHS) Spread 3M futures-spot (RHS)
Spot Trend 3M LME Futures-SpotContango market in early 2015 – Robust support for prices
(USD/mt)
Source: Bloomberg
(USD)
Corporates
FY16 Outlook: Non-ferrous Metals
April 2015 8
Domestic Scenario
Demand Growth
Ind-Ra expects domestic metal demand growth for FY16. The key sectors driving demand
growth, such as electricals, power and construction, are likely to see a modest recovery in
investments given a moderate infrastructure push in the most recent national budget. Domestic
copper production and usage increased by an estimated 26% yoy and 5% yoy, respectively, for
TTM October 2014. Metal exports to China continued to support high domestic production
growth. The agency expects exports to China to more or less remain flat in the absence of a
recovery in the real-estate construction sector. In the medium term, the agency expects India
and China to persistently overwhelm global copper production.
Figure 12
Robust TCRC
In FY16, the agency expects TCRC margins to remain robust at the current levels due to
continued supplies from new mines in the international market. The expected surplus in global
copper concentrates along with additional mining capacity favours TCRC. Figure13 shows the
agency‟s observation that copper ore prices did not move up in tandem with metal prices in
1HFY15. However, it did catch-up with metal prices by October 2014. India is among the top 10
countries by smelting capacity. Smelters generally pass through increases in copper prices and
earn TCRC margin.
Figure 13
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
Oct 08 Jun 09 Jan 10 Aug 10 Apr 11 Nov 11 Jun 12 Feb 13 Sep 13 Apr 14 Nov 14
Metal import by China/India value total
India Metal Exports to China
(USD 000)
Source: Bloomberg, WBMS, Customs China
0
100
200
300
400
500
130
150
170
190
210
Oct 08 Jun 09 Jan 10 Sep 10 Apr 11 Nov 11 Jul 12 Feb 13 Oct 13 May 14 Dec 14
WS copper price index (LHS) Copper ore WS price index (RHS)
India Cu Metal and Cu ore Price Trends – Indexed
Source: Bloomberg, WBMS, 2004-2005:100
Corporates
FY16 Outlook: Non-ferrous Metals
April 2015 9
Figure 14
Operating Profits Likely To Improve
The operating profitability of local players is likely to benefit from their improving operating
levels and realisations. However, the positive impact of a recovery in key by-products, such as
sulphuric acid and precious metals, on the operating margins would partly be offset by higher
power charges.
India depends on imported ore/concentrates to a large extent and is a net exporter of the
primary metal.
Hindustan Copper Ltd. is the only integrated producer in India, SSL and Hindalco primarily are
custom smelters. India‟s export trade recovered from the lows of FY14 and posted strong
volume growth of 10% yoy in TTM October 2014. A weak rupee is generally favourable for both
integrated and non-integrated copper miners. However, integrated producers are in a better
position to sustain their operating margins in the event of volatility in input prices and/or forex
rates.
Figure 17
Figure 18
40
80
120
160
Jan 10 Jul 10 Dec 10 Jun 11 Dec 11 Jun 12 Dec 12 Jun 13 Dec 13 Jun 14 Dec 14
Indexed LME price Indexed indian prices USD INR exchange rate
Copper Price Trend-LME & India
(Index)
Source: Bloomberg, LME, Ind-Ra estimates
0
20,000
40,000
60,000
80,000
Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14
Hindalco Sesa Sterlite Hindustan Copper
Quarterly Revenue Trend with Top Producers
(INRm)
Source: Company results
0
50
100
150
200
250
Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14
Hindalco Sesa Sterlite
Quarterly Profitability Trend with Top Producers
(Index, 2012=100)
Source: Company results
Figure 15
Figure 16
Corporates
FY16 Outlook: Non-ferrous Metals
April 2015 10
Zinc
Global Scenario
The global zinc market continued to be in deficit in 2014, despite China‟s net imports of the
metal falling about 3% in TTM October 2014. Globally, the zinc market posted production and
consumption growth of 6% and 5%, respectively in TTM October 2014. The metal consumption
in January-November 2014 grew 5% yoy while the production grew 4.2% yoy. Zinc prices
averaged to USD2,170/ton, up from USD1,943/ton in 2013.
Fitch Ratings expects the average refined metal price to be at about USD1,950/ton in 2014-
2016. Inventory levels remain high; however, a portion of them is tied to financial transactions.
Physical supply may be tighter than that implied by the stock level. Long-term price would
depend on the timing of the planned mine closure and ramping-up of new supplies.
Large mines including Vedanta‟s Lisheen mine and MMG Ltd‟s Century Mine are likely to be
closed in the next few years due to ore depletion. However, the expected price levels may not
be remunerative enough to encourage the development of greenfield supplies. To that extent,
the supply deficit is likely to continue. In addition, funding and/or country risk issues could lead
to the continued deferment of some planned projects. In this backdrop, Fitch Ratings has its
long-term price assumption at USD2,050/ton.
Figure 19
Figure 20
-4
-2
0
2
4
6
0
3,000
6,000
9,000
12,000
15,000
2009 2010 2011 2012 2013 2014
Production (LHS) Consumption (LHS) Percentate surplus to consumption (RHS)
Zn Metal Slab Production & ConsumptionStrong consumption growth
Source: Bloomberg
(%)
0
500
1,000
1,500
2,000
2,500
3,000
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
Jan 08 Oct 08 Jun 09 Mar 10 Nov 10 Aug 11 Apr 12 Jan 13 Sep 13 Jun 14 Feb 15
LME inventory (LHS) LME price (RHS)
Zinc Inventory & Price MovementLME inventory off the peak
(000mt)
Source: Bloomberg/London Metal Exchange
(USD/mt)
Corporates
FY16 Outlook: Non-ferrous Metals
April 2015 11
Figure 21
Domestic Scenario
Deficit to Support Premiums
Ind-Ra expects the zinc industry players to benefit from improved fundamentals. Domestic
realisations and operating profitability in FY16 are likely to improve due to an increase in metal
demand amid a global supply deficit on back of growth in steel production. Galvanisation of
steel is the key end-industry, consuming an estimated three-fourths of the domestic production.
The agency expects the demand growth for steel to be 5.5%-6.0% in FY16 compared with
1.3% in 8MFY15.
Robust Exports Outlook
The agency expects the domestic supply situation to remain comfortable in the medium term.
HZL plans to increase its mining capacity to 1.2mtpa (metal) by end- FY15. The company‟s
metal production volume declined by 7% yoy in TTM December 2014 due on-going mine
development. India‟s annual consumption is estimated to be at about 0.7mt in FY15 while the
proportion of exports to production to be about 25/30% of the production.
Robust Operating Profits Outlook
The global deficit situation is likely to underpin steady physical premiums and operating profits
in FY16, as in FY15. Ind-Ra expects the strong LME price to fully percolate into domestic
realisations in FY16. HZL‟s average realisations increased 14% yoy in TTM December 2014 on
back of strong LME Prices. However, is operating profitability improved only marginally due to
the higher cost of production and lower by-product realisation.
The cost of production at HZL increased due to a decline in production volume because of pre-
stripping works developing a mineral block for higher mining capacity. The decline in silver
prices, a key by-product, also impacted operating profits. Average silver prices declined about
14% yoy to about USD18/oz. The agency expects the silver prices to range between USD17/oz
-USD19/oz.
-60
-40
-20
0
20
40
60
0
500
1,000
1,500
2,000
2,500
3,000
Jun 10 Nov 10 May 11 Nov 11 Apr 12 Oct 12 Apr 13 Sep 13 Mar 14 Sep 14 Feb 15
Last price (LHS) Spread (futures 3M-spot) (RHS)
Spread between Three Month Futures and SpotLow contango contrary to demand-supply gap
(USD/mt)
Source: Bloomberg
(USD/mt)
India‟s zinc industry is marked by a duopoly with Hindustan Zinc Ltd (HZL) and Binani Zinc Ltd. being the only two meaningful metal producers. HZL is among the top three integrated players globally (in terms of metal capacity) with cash cost in the lower quadrant.
Sesa Sterlite Ltd. IND AA+/Stable/IND A1+ IND AA+/Stable/IND A1+ Century Aluminium Manufacturing Co. Limited
IND BB (suspended) IND BB/Stable/IND A4+
Gravita India Ltd IND BBB+/Stable/IND A2 IND BBB+/Stable/IND A2
Source: Ind-Ra
Corporates
FY16 Outlook: Non-ferrous Metals
April 2015 14
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