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Copper consumption growth slows

Source : BUSINESS_STANDARD
Last Updated: Thu, Sep 20, 2012 21:38 hrs

The slowdown in various key sectors such as construction, power and industrial machinery, has hit copper consumption. And going ahead, the trend is likely to remain same for this calendar year.

According to estimates by research and ratings firm Icra, India’s copper consumption growth will remain at four per cent this year as against 6.3 per cent during the last calendar year. The study estimates total consumption this year at 562,000 tonnes as compared to 540,000 tonnes in the previous year.

Obviously, the margins of companies are under pressure. The big companies in the sector are Sterlite Industries, Hindalco and Hindustan Copper.

“Copper is the main component for copper tubes, pipes, section, wire bars, etc. There is sharp volatility in prices, which fell by over $1,000 per tonne since May and again regained to $8,000 per tonne. This affects the cost structure for companies like us,” said a senior official from Nissan Copper.

The company has seen its margins shrinking due to sharp increase in copper prices since May. It reported a net loss of Rs 1.9 crore for 2011-12, against a profit of Rs 12.5 crore in the previous year. According to analysts, net profit margins have been under pressure at negative 0.7 per cent for 2011-12, against 4.2 per cent in the previous year. For the June quarter, Nissan Copper posted a net loss of Rs 22.7 crore.

Copper consumption is directly linked to the economy’s growth. Hence, the decline in the use of copper indicates a contraction in demand for consumer products from sectors, including electrical and electronics, housing, among others.

“There is pressure on copper consuming industries due to high volatility in metal prices over the past year. Also, the macroeconomic condition is not supporting industrial production. Therefore, consumption of the commodity will drop. The scenario is the same for most of the copper-consuming industries,” said Biren Vakil, founder and chief executive of Paradigm Commodity Advisors.

Although India’s annual per capita consumption of copper has increased from 0.23 kg in 2000 to 0.5 kg in 2011, it compares poorly with China’s per capita consumption of 5.9 kg. Over the medium term, India’s per capita consumption growth is not expected to mirror the strong growth trend evident in China.

Pukhraj Sethiya, manager, PricewaterhouseCoopers, said, “The demand for base metal, especially copper, has seen a gradual increase over the years barring the last few months. In general, the base metals market has remained stable and prices have increased over the period. The future outlook of base metals also shows relatively stable demand and price scenario in the longer term though there may be short term troughs.”

India’s primary copper production capacity has remained at 950,000 tonnes per annum over the last few years, which is set to increase to 1.45 million tonnes by 2014-15 with higher exports of refined copper and products to Europe and Africa.

Due to increase in copper prices in the global market, investments in the base metals sector has seen revival over the past few years. For example, public sector producer Hindustan Copper has reopened its closed mines by engaging private operators in some of these. India still relies on imports for meeting significant component of its base metal demand and the sector still has investment potential.

Although world copper prices increased 17.2 per cent to $8,828 a tonne last year, they experienced a sharp fall from August 2011. By comparison, domestic prices increased 16.6 per cent to an average Rs 455.3 a kg. Domestic prices have, however, declined at a lower rate from late-2011 because of the substantial rupee depreciation.

“Coincident indicators such as PMI (dipping since January-February), order inflows (no growth ex-L&T and BHEL which benefited from a spillover and a low base, respectively) and consumer durables demand (12 per cent nominal growth but possibly price-led as mostly imported products built in currency depreciation) do not suggest a meaningful pick-up is taking place,” said Lokesh Garg, an analyst with Kotak Institutional Equities Research.

The slowdown, which started in September 2010, is two years old and has been acute. Incrementally the risk is of a continued slowdown. A prolonged slowdown may lead to more margin pressure even as margins have been stable so far, barring in the transformers segment.

Sethiya, however, believes that future prospects for the base metals market depend on China’s economic performance, which accounts for over 40 per cent of global base metals consumption.



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