Base metal luster to aid non-ferrous field

Analysts believe that favorable demand-supply dynamics has improved prospects for other base metals such as copper, zinc and lead, with prices rising 18-32% on the London Metal Exchange in 2021.

Nevertheless, lack of demand from China and the spread of the Omicron variant has emerged as a concern in recent months. But higher and sustained prices augurs well for the earnings prospects of Indian non-ferrous companies. Analysts remain positive on base metal prices.

Rating agency ICRA Ltd said absolute prices for the domestic non-ferrous metals industry will remain at a comfortable level. Analysts at ICRA said, “Prices are expected to continue to rise in CY2022, even as Omicron’s rising spread across the globe cannot rule out the risk of further downside in prices, less visible.” Inventory and stagnant demand can insulate against any sharp price correction.”

Note that the demand-supply position for aluminum and other base metals remains tight as compared to steel. Demand for Chinese steel has plummeted due to the real estate crisis in that country and efforts to decarbonise. This will put pressure on steel prices internationally and also limit profits for Indian steel makers.

However, a structural change in China’s demand pattern for base metals is expected to help. Analyst at Jefferies India Pvt Ltd. Ltd. said Chinese demand is shifting from urbanization and industrial development to new economy infrastructure such as renewable energy. This should lead to a shift from steel and coal to copper, aluminum and other “energy transition” metals in 2022. Jefferies is most optimistic on copper and aluminum this year.

In such a situation, better copper realization will increase the revenue of companies with smelters. But TcRc (treatment and refining charge) margins remain soft and should improve to boost profitability.

For aluminium, it helps that there are no near-term large capacity additions outside China, which will also see restricted supplies as production is curtailed to cut carbon emissions. These factors will support aluminum prices and Hindalco Industries Ltd. and National Aluminum Company Ltd. (Nalco) will gain immensely.

Strong global aluminum prices benefit Hindalco, whose domestic operations have posted strong profitability over the past few quarters. Edelweiss Securities Ltd. estimates Hindalco’s aluminum business EBITDA per tonne for FY22 67,370, up 140% year-on-year. It is expected to improve some more in FY23. In addition, Novelis contributes to more than half of Hindalco’s operating profit and has low earnings risk. Novelis is a converter of metals and, therefore, is insulated from the volatility of aluminum prices.

In turn, Nalco may benefit from higher alumina prices. It is one of the lowest cost bauxite and alumina producers globally and a leading exporter of alumina and aluminium. While Vedanta Ltd.’s earnings depend on sectors such as crude oil, iron ore, steel and power, the company will benefit from a rise in aluminum and zinc prices. The zinc market is also expected to be in deficit after some European smelters decided to cut production in October. Favorable demand and strong realization outlook has helped Hindustan Zinc Ltd.

Meanwhile, a sharp rise in base metal prices supported the stock’s performance. Shares of Vedanta, Nalco and Hindalco rose in the range of 91-147% in the last one year, which shows that investors are incorporating a good bit of optimism into the prices.