In the June quarter, along with precious metals, base metals prices also fell sharply. However, Indian consumers did not benefit from that fall due to the decline in the value of the rupee against the dollar.
Aluminum and nickel are trading at their four-year low levels in the international market, while copper is at a 35-month low. Zinc and lead are also trading around levels seen two years ago. Metals prices fell as there have been concerns on China's economic growth resulting in lower demand. Indications from the US Federal Reserve on withdrawing its bond-buying programme have also resulted in unwinding positions in metals.
"Base metal prices are primarily responding to conditions in China, since 40 per cent or more of global demand for these metals now emanates from Chinese end-users," said Nic Brown, head of commodities research at French investment bank Natixis. "With Chinese growth disappointing, and the PBOC (People's Bank of China) perceived to have implemented a notable tightening of monetary conditions over the past week, base metal prices have retreated to recent lows."
This has impacted Indian companies as well. "All metal companies stand to lose because of low volume, weak realisation and forex (foreign exchange) losses. Users industries like automobile and capital goods will also have not much to gain as a weak rupee nullified the benefit of low prices globally," said Kamlesh Kotak, head-equity research at brokerage firm Asian Market Securities. The rupee fell 8.6 per cent in the quarter through June, the most since 2011.
"If the rupee stabilises, soft metal prices will be big positive for auto companies," Kotak added. Still, companies like Finolex Cables
see falling prices helping them, although in a limited way. "The lower rupee has taken away all benefits. Our cost, however, was slightly higher in last year's June quarter compared to this quarter," Finolex executive chairman Deepak Chhabria said.
Exide Industries, a major consumer of lead for producing lead batteries, has been facing pressure of the weaker rupee. Kim Eng Securities India, a foreign institutional investor, said in its research on Exide: "The 12 per cent depreciation in the rupee's exchange rate versus the dollar in the past month-and-a-half would hurt Exide because imported lead comprises significant cost of raw material. Given the continued weak demand for automotive and industrial batteries, we believe it will be difficult for Exide to increase the selling price of its batteries, leading to pressure on margin."
An Exide official, who did not want to be named, said 70 per cent of the cost in batteries was of lead, whose prices in India had gone up this June quarter. "We have not been able to pass it off, as that always happens at a leg." Average lead prices were higher in the June quarter by 14.7 per cent in India, compared with the year-ago period. The London Metal Exchange lead average price was four per cent higher than last year.
How long the trend in falling prices will continue is an issue, but metals consolidation with a stable rupee could come to the rescue.
"For us, the outlook for base metal prices is mixed. Some metals such as copper and lead are expected to experience deficits over the second half of this year, particularly if Chinese growth surprises on the up-side. Others such as aluminium and nickel are likely to remain in significant over-supply even if Chinese growth improves," Natixis' Brown said. "We, therefore, see substantially more potential upside for copper and lead prices than we do for aluminium or nickel."