Why A Surge In Copper Price Means Little For India’s Metal Industry

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Copper has outperformed other base metals such as aluminium and zinc amid a broad rally in commodities. Still, that offers little cheer to the Indian industry.

The bellwether industrial metal rose above $9,000 a metric ton for the first time in nine years, taking a step closer to an all-time high set in 2011. That, according to a Bloomberg report, was boosted by rapidly tightening physical markets, prospects for rebounding economic growth and hopes that multi-year low inflation in key economies may be ending. Besides, governments’ focus on building renewable energy and electric vehicle infrastructure is expected to lift demand for the metal used as raw material.

CARE Ratings Ltd. said supply issues and strong demand, particularly from top consumer China, are expected to keep copper prices elevated over the next quarter before the constraints are resolved this calendar year.

But that would mean little for India’s metal industry.

The domestic copper industry, ICRA Ltd. said, has been operating at almost half its capacity for the last two financial years due to closure of Vedanta Ltd.’s 400,000-tonne smelter unit at Tuticorin—that accounted for nearly half of the nation’s output. In the fiscal ended March 2020, Hindalco Industries Ltd. alone accounted for 80% of the overall refined copper production, while Hindustan Copper Ltd. and Vedanta’s Silvassa unit produced the balance, the rating agency said in a report.

According to Rakesh Arora, managing partner at Go India Advisors, the only company that benefits from this rally is Hindustan Copper, given a $1,000-per-tonne increase in copper price would mean higher operational profits.

A surge in copper price boosts the top and bottom line of Hindustan Copper. For every $100 increase/decrease in the LME price of the red metal, the turnover and profit margin of the company varies by Rs 18-20 crore, a company official told BloombergQuint on the condition of anonymity.

Arora, however, cautioned that the public sector company’s Copper stock is highly valued as it has already risen close to 60% over the last two weeks.

To be sure, that’s in line with gains in metal stocks as talks of a burgeoning commodities’ boom gather pace with JPMorgan Chase & Co and Goldman Sachs saying a new supercycle may have begun.

For Hindalco Industries, Arora sees some pressure in margin because of a cut in treatment and refining charges—that miners pay smelters for converting copper concentrate into refined products like cathode and bars.

Satish Pai, managing director at Hindalco, during an analyst call held after third-quarter earnings said the benchmark treatment and refining charges for the calendar year 2020 settled 4% lower than a year earlier, while the spot fees remain stretched during the ongoing quarter ending March as well.

The copper division, according to a company presentation, contributed 3.8% and 3.5% to Hindalco’s operating income in the quarter and nine months ended December, respectively.

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