Indian Metal and Mining industry can survive a China slowdown

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.

The Dollar Business Bureau Metals-The-Dollar-Business India’s metal prices depend substantially on Chinese economic activity as China accounts for 40%-50% of the global consumption of aluminium, copper and zinc metals. For China, the latest leading economic indicators are not encouraging with a weak output and low order growth rates as real estate construction activity is unlikely to recover in the short-term. Against this back-drop, Indian industry can sustain realisations and operating profits driven by a steady physical premium, said an industry report. 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 report said that it does not expect the low aluminium price levels of sub US$ 1,689/ton observed in 2014 to be revisited in FY16. However, price levels above US$ 1,900/ton may not be sustained for long, given the global over supply situation and higher inventories. The report 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, the report 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 report, zinc prices remained strong in 2014 with a favourable demand-supply situation.