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Non-ferrous metals market continues to remain in deficit: ICRA

As per an ICRA note, the slowdown in production growth of aluminium and copper was in turn a result of capacity constraints, which is unlikely to improve significantly in CY2019.

, ET Bureau|
Jul 03, 2019, 03.07 PM IST
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KOLKATA: Even though international prices of the three non-ferrous metals - aluminium, copper and zinc have witnessed corrections of 20%, 13% and 16% respectively in the last one year, primarily due to macroeconomic uncertainties on the back of ongoing trade wars and other country-specific factors, the fundamental supply-demand balance suggests otherwise. While global consumption growth of aluminium and copper during Q1 CY2019 was muted at 1.4% and 0.8% respectively, as against 4% and 2.3% respectively in CY2018, consumption of zinc registered a de-growth of 1.3%, as against 0.3% de-growth registered in the last calendar year. Despite muted consumption levels, the markets of the three key non-ferrous metals continued to remain in deficit in this period, with shortages in fact expanding on a Y-o-Y basis, as production growth was even lower than the growth in demand, according to an ICRA note released on Wednesday.

As per an ICRA note, the slowdown in production growth of aluminium and copper was in turn a result of capacity constraints, which is unlikely to improve significantly in CY2019. Production of zinc may improve in the second half of the year, which may bring the market back into a balance.

Commenting on the situation, Mr. Jayanta Roy, Senior Vice-President and Group Head, Corporate Sector Ratings, ICRA said: “For the calendar year 2019, while deficits in the aluminium and copper markets are likely to expand, the zinc market is expected to be balanced. Consequently, the risk of a sharp correction in base metal prices from the current levels seems low in the near term purely based on fundamentals.”

The global aluminium market has remained at a deficit, varying from 0.07 to 1.01 million metric tonnes (MMT) for the last eight quarters, because of capacity cutbacks in China. While aluminium production in the country started increasing in the second half of the last calendar year, a further shut down of some loss-making capacities resulted in production de-growth in March and April 2019. No meaningful improvement in the supply scenario is envisaged in the near term as the idled capacities are unlikely to resume production at the current subdued price levels. Moreover, the total capacity of fresh aluminium smelters to be commissioned in CY2019 is also limited.

The copper market, with a marginal surplus of 0.12 million metric tonne (MMT) in the first quarter of CY2018, returned to a large deficit in the last one year, impacted by the closure of 0.4 MMT copper plant of Vedanta in Tuticorin. The global zinc market has also been in a deficit for the last four quarters. The deficits in the different base metals are likely to support prices, notwithstanding temporary fluctuations, typical of any internationally traded commodities.

In the domestic market, says ICRA, the depreciation of the rupee against the US dollar from the levels prevalent a year ago, has lent a support to base metal prices, as realisation in the Indian market is determined on an import parity basis. For copper, domestic prices received an additional support from higher spot premiums as a result of a shortage of the metal in the market.

The impact of the shutdown of Vedanta’s copper complex has resulted in a shortage of copper in India. “The deficit in copper, which was at 39% of consumption, is likely to expand in FY2020,” Mr Roy added. On the other hand, 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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