Mumbai: Favourable momentum for non-ferrous metal prices is likely to continue for the next 12-15 months, ratings agency ICRA said in a note.
Accordingly, the increase in prices is due to a steady turnaround in demand conditions, additionally, prices may have also been influenced by the ample liquidity in the global financial markets, the note said.
The international prices of aluminium, copper and zinc are currently up by 12 per cent, 28 per cent and 17 per cent, respectively, on a year-on-year basis and by 38, 70, and 47 per cent from their respective lows registered in March-April.
As per the ICRA note, the outbreak of the Covid-19 pandemic had severely impacted the global automobile, construction and electrical machinery industries, which together contribute 75-85 per cent to the global non-ferrous metal demand.
Consequently, in this period, consumption of these metals had contracted significantly, ranging from 3-4 per cent for copper and zinc; and upto 8 per cent for aluminium on a Y-o-Y basis.
However, the extent of contraction in demand has been lower than anticipated during the initial months of the pandemic, the note said.
Moreover, the global demand is currently on the path to recovery led by a turnaround in demand conditions in China.
"Although global growth in non-ferrous metal demand on a Y-o-Y basis is estimated to have remained in the negative territory in the third quarter of this financial year, growth outlook is favourable for the coming quarters," the note said.
"The recent improvement in non-ferrous metal prices coupled with a correction in input costs would support consolidated operating margin of the domestic industry, which is likely to improve to 21 per cent in FY2021 and subsequently to 23 per cent in FY2022 from 15 per cent in FY2020."
According to Jayanta Roy, Senior Vice-President and Group Head, Corporate Sector Ratings, ICRA, the current buoyancy in prices is a result of the improvement in global macroeconomic sentiments with the beginning of vaccination drive against Covid-19.
"The favourable momentum is likely to continue in the next 12-15 months, thereby resulting in a steady turnaround in the risk profile of the industry," Roy said.
"Downside risks, however, remain as the macroeconomic uncertainties due to the Covid-19 pandemic are yet to dissipate. Nevertheless, prices are unlikely to reach the lows of Q1FY21, thereby supporting margins."
Besides, the total indebtedness of the domestic manufacturers is currently high, with a consolidated debt of almost Rs 650 billion drawn to fund the large capacity expansion projects commissioned in the past.
"On the back of buoyant metal prices, the prevailing scenario provides an opportunity to the industry now to deleverage the balance sheets before the next commodity downcycle kicks in."
"Moreover, with an improvement in operating profits, the debt coverage indicators would improve... interest cover of 2.7 times in FY2020. The resulting scenario leads to a revision in the credit outlook on the domestic primary non-ferrous industry to 'Stable'."