September has cast a long shadow on the non-ferrous sector’s earnings season. Till August, companies were still optimistic, as robust demand and realizations made for a good environment. Now global metal companies are talking about possible production cuts.
Investors find themselves in uncharted waters again. They will not have forgotten 2008, when metal prices plummeted, leaving a hole in company finances, and their portfolios as well. The situation now is not nearly as bad as then, but who knows what will happen next.
Also See | Losing Sheen (PDF)
Till end-August, prices of non-ferrous metals—copper, aluminium, zinc and lead—were up by 11-27% year-on-year. End-September saw that change to a decline of 8-15%. The impact of falling prices will partially be felt in the September quarter, and more fully in the December one. A moderation in energy costs—since crude oil has also declined—should provide some relief to producers. The recent depreciation in the rupee is another important factor; it limits the impact of the fall in prices (but does not fully compensate for it). Unfortunately, it also takes away the benefit of lower energy costs. Provisions related to foreign currency-related volatility may cause some upsets as well.
Hindalco Industries Ltd’s domestic output of aluminium has improved on a sequential basis. Novelis Inc., its overseas subsidiary and major contributor to results, has benefited from growing demand and rising processing charges. Falling aluminium prices do not affect Novelis’ core performance, but timing differences will see a temporary effect on its results. Lower working capital requirement will be a positive.
Sterlite Industries (India) Ltd’s aluminium output has been relatively flat, sequentially. Hindalco and Sterlite both also operate custom copper smelters. Output for both companies is higher on a sequential basis. Lower copper prices do not affect them, but will lower their working capital requirements. Physical demand for copper is not showing any signs, as yet, of a decline. Treatment and refining charges (Tc/Rc), their main income, have improved relative to previous years. But if copper mines restrict output, lower availability of concentrate could again see pressure on Tc/Rc rates in the longer run. Companies’ copper business will also benefit from higher realizations on by-products.
The current quarter’s performance will show the non-ferrous sector in seemingly fine fettle. Investors will take a quick look at them, and go back to pondering their fate in the quarters ahead.