ICRA expects the primary base metal industry's earnings to weaken significantly in FY2023 and remain so in the near term, owing to stubbornly high energy costs and range-bound metal prices. While better coal linkage availability would provide some respite, the margins would remain significantly lower than the levels seen in FY2022, the rating agency said.
Mr Jayanta Roy, Senior Vice-President and Group Head, Corporate Sector Ratings, ICRA, said, "The operating margins of domestic base metal entities are estimated to weaken significantly by around 10 percentage points (pp) in FY2023 owing to the double whammy of metal price corrections and elevated coal costs. While the availability from coal linkages has improved in recent months, the same would be tested during the upcoming summer season when coal demand from the power sector increases. In addition, the e-auction premia on coal, despite softening recently, remains high at ~170%. Consequently, the operating margin of domestic entities is expected to remain range-bound at 19-20% in FY2024."
International prices of base metals have contracted by a steep ~18-28% in FY2023, compared to the record highs in March 2022 amid considerable volatility. Although the fiscal commenced on a healthy note, the metal prices witnessed significant headwinds during Q2 FY2023 and Q3 FY2023 given an uncertain global economic outlook and demand slowdown in China. With China reopening, some positive sentiments built up in January 2023, when metal prices touched almost their six-month high. However, the rally was short-lived as metal prices plummeted again in February and March 2023, owing to uncertainty over the strength of China's recovery and continued weak global sentiments.
The total indebtedness of the domestic entities is expected to increase owing to large capital expenditure plans of ~US 10 billion over the next five years. Consequently, the total debt-to-operating profits (TD/OPBDITA) is likely to increase to 1.7-2.0 times in FY2023 and FY2024 from 1.1 times reported in FY2022, in ICRA's base case. While the same remains comfortable in the base case scenario, any further weakening in the earnings profile due to deterioration in the global macro-economic environment could affect the industry's leverage indicators.
Globally, the base metals supply is expected to remain tight in CY2023, owing to persistent supply issues, resulting in a low inventory position. A significant production cut happened in Europe in CY2022, amid high energy cost. While the energy prices have declined in Europe, the same remains high compared to historical averages. Consequently, the production has not been restored to earlier levels. In addition, intermittent production issues keep impacting the base metals supply in key producing regions. In CY2022, there was an aluminium production cut in China's Yunnan province, owing to power related issues, while copper supply was also hit owing to geopolitical issues in Peru. Nonetheless, the apparent consumption of base metals also remains subdued owing to heightened fears of global economic slowdown. "While Chinese apparent consumption slightly improved in Q4 CY2022, the global demand outlook of base metals remains uncertain, and would hinge on the housing sector recovery in China and improvement in global sentiments," Mr. Roy concluded.