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Icra sees limited downside for base metals

The global aluminium market has remained in deficit for the last six quarters.

, ET Bureau|
Jan 10, 2019, 01.28 PM IST
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The impact of the shutdown of Vedanta’s copper complex has resulted in a shortage of the metal in the domestic market.

Commodity Summary

Icra in its report released on Thursday has said that demand supply fundamentals do not worry an significant downward pressure on base metals from current levels.

The global non-ferrous metal prices which witnessed a correction in the last five months or so because of concerns on the global macroeconomic health on the back of on-going trade wars, are unlikely to correct significantly here onwards. The Icra report said that the demand supply fundamentals would not justify any further major correction, as the global market of these metals are currently in deficits.

Commenting on the situation, Mr. Jayanta Roy, Senior Vice-President and Group Head, Corporate Sector Ratings, ICRA said: “For the full calendar year 2018, the aluminium, copper and zinc markets have remained in deficits. Consequently, the risk of a further downside in base metal prices seems low in the near term”.

The global aluminium market has remained in deficit for the last six quarters, because of capacity cut backs in China. However, production in China is estimated to have increased in the last six months, and the trend may continue, going forward, with new capacities coming on stream. Notwithstanding higher production, global aluminium market was in deficit in Q3 CY2018. Moreover, for the current winter months, the decision on the extent of production cuts under the revised pollution control norms in China has been decentralised to the provincial Governments. However, the Government has brought more provinces under the norms, thus effectively mandating more smelters to abide by the production curtailment norms during the months from November to March. The effectiveness of the controls on Chinese production and therefore the global demand-supply position would determine the trajectory of aluminium prices over the coming quarters.

The global zinc market is currently in a deficit after remaining in surplus in the first few months of this calendar year. The copper market, which had been in a marginal surplus of 0.12 million metric tonne (MMT) in the first three months, was also in a large deficit in the next six months, impacted by the closure of 0.4 MMT copper plant of Vedanta in Tuticorin. The deficit is likely to support international copper prices, notwithstanding temporary fluctuations typical of internationally traded commodities. In the domestic market, the sharp depreciation of the rupee against the US dollar has provided an additional support to base metal prices, as realisation in the Indian market is determined on an import parity basis.

The impact of the shutdown of Vedanta’s copper complex has resulted in a shortage of the metal in the domestic market. As a result, local downstream copper product manufacturers were adversely impacted, during the first half of this financial year, due to a lack of adequate primary metal in the market. “The situation remains uncertain as on date as the Madras High Court has ordered status quo, putting on hold the recent relief granted by the National Green Tribunal permitting reopening of the Tuticorin plant”, Mr Roy added.

On the other hand, mentions the ICRA note, an excess supply situation in domestic aluminium and zinc sectors is likely to persist as domestic capacities are higher than demand and manufacturers are expected to operate the plants at high asset utilisation levels. This in turn would lead to large export volumes. Off-take risks in the international market, however, would remain low, given the expected deficits in the global market and the cost competitiveness of the domestic manufacturers.

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