Subdued realisations, higher energy costs to shrink margins of base metal industry by 200-225 bps in FY2024

Subdued realisations, higher energy costs to shrink margins of base metal industry by 200-225 bps in FY2024

The earnings of the primary base metal industry would remain under pressure in H2 FY2024, after a lacklustre first half performance, which saw operating margin declined by ~250 bps, said a recent report by ICRA. Stagnant base metal prices in the last two quarters and a recent increase in energy costs are the key headwinds affecting the margins, it added. Nevertheless, the domestic demand growth rate is likely to remain healthy at ~10 per cent in the next two fiscals and would significantly outpace the expected rate of global demand growth. As a result, despite pressure on profitability, ICRA has maintained a stable outlook on the sector.

International prices of three non-ferrous metals, viz. aluminium, copper and zinc, have been range-bound and fell by 2-3 per cent in the last two quarters. Such prices are unlikely to improve substantially in the near term owing to uncertainties in the global macroeconomic environment. Besides, the energy costs are expected to rise in H2 FY2024, as the domestic e-auction premia on coal is projected to be significantly higher at ~105-110 per cent in H2 compared to ~75-80 per cent in H1 FY2024.

Amid contraction in earnings, the committed expansion plans of the players are likely to increase the industry’s leverage (total debt/operating profits) to 2.2-2.5 times in FY2024 and FY2025 from 1.8 times in FY2023. However, these leverage levels are lower than the FY2016-FY2020 average of ~3.5 times reported during pre-covid era. At the current level, the report added, the industry would remain resilient to project related risks. In addition, healthy domestic demand of base metals in the coming two fiscals, given the Government of India’s thrust on infrastructure development and favourable demand from the renewables/electric vehicle sectors, would support the earnings to an extent.

Global apparent consumption of base metals, however, is estimated to remain adversely impacted in CY2023, given the sluggish demand conditions, primarily in the developed nations. Jayanta Roy added, “While consumption of non-ferrous metals improved in China in the current calendar year, demand in the rest of the world, primarily in the western economies, remained weak. The prospect of a significant improvement in the near term seems unlikely, given the heightened concerns over an economic slowdown. Besides, with an improvement in metal supply, primarily in China, the global metal balance is likely to remain in surplus in CY2024 as well, which would limit the upward price movement in the near term.”