Tamil Nadu ordered Sterlite Industries on Monday to shut India's biggest copper smelter over pollution concerns, in a move that could spur imports and drive up regional premiums for the metal.
The smelter, ensnared in a lengthy legal dispute, produces more than 300,000 tonnes a year to supply half of India's domestic copper needs, and its closure could cause a supply gap that opens the door to foreign refiners and traders.
"The Tamil Nadu Pollution Control Board has ordered closure of the plant," Sterlite said in a statement to the exchange, referring to a directive from the state emissions regulator, but gave no details of when it expected to resume operations.
Late last week, copper premiums in Singapore fell to around $30 to $40 from $55 to $60 earlier in March, after a rise last month in copper stockpiles in LME warehouses in Asia, traders said.
A shutdown of Sterlite' copper smelter could tighten supplies in the region, however, and lift premiums if Indian consumers have to fill their needs from international markets, traders said.
"If there is a shortage of copper in the local market, premiums will go up. There could be a further rise in premiums if China starts buying," said Ravindra Mardia, managing director of Mardia Samyoung, a trader and former customer of Sterlite based in Mumbai, the Indian financial capital.
India consumes around 600,000 tonnes of copper annually - about three percent of the world's total, and far behind China, which took around 9 million tonnes last year.
While regional stockpiles have ballooned since December as the global copper market swings into surplus after years of deficit, stocks are not easily available due to Glencore's dominance in warehousing in Malaysia's port of Johor.
Shipments have also been affected by a port strike in Chile, while output at top producer Codelco has been affected by a strike this week suggesting a near-term shortfall in supply, traders said.
"If they can't ship material, then there should be an impact on premiums. How big an impact depends on how long this shutdown will last," a Singapore-based trader said.
Sterlite, a unit of Vedanta Resources, has faced a lengthy legal battle over environmental concerns at its smelter plant in Tuticorin, with the first of many petitions against it filed in 1996. The case is pending in the Supreme Court.
The company told the National Stock Exchange it would explain matters regarding emissions from the Tuticorin unit to the state regulator the Tamil Nadu Pollution Control Board.
Shares of Sterlite fell more than 5 percent in a flat Mumbai market.