Why non-ferrous metal stocks are expected to be under pressure in the near term

Domestic primary non-ferrous metal companies, or firms engaged in aluminium, copper and zinc sectors in particular, will continue to face the heat in the next three months owing to elevated input costs, while metal prices may remain range-bound.

As a result, operating margin projected for the full year ending March 2023 has been revised downwards by almost 3 percentage points (pp) over earlier forecasts and 10 pp lower compared to FY2022, according to rating and research agency ICRA. The silver lining being that in the coming financial year, some respite is expected from better availability of coal linkages.

International base metal prices have corrected significantly by a steep 35-50%, even though the percentages vary for non-ferrous metals, till October 2022, compared to the record high last March.

At present, prices have slightly improved by 5-10% from the bottom in October; however, given the continuing uncertainty about global economic outlook especially surge in Covid cases in China, the metal prices are expected to remain range-bound, despite supply constraints.

The global consumption of base metals is estimated to have remained weak in 2022 as a calendar year due to China’s lacklustre performance amid multiple lockdowns and weak performance of its housing sector. Outside China too, the sentiments remained subdued as monetary policy was tightened in major world economies to fight the soaring inflation leading to anticipated fear of global economic slowdown.

This year, the demand growth is expected to remain moderate with a downside risk, particularly in Europe. While demand slowdown eased the metal balance to an extent, the supply-side constraints kept the metal balance tight last year. This is expected to continue this year too.

Higher energy prices in Europe have led to decline of almost 1 mmt or 10-15% of capacity in the continent of aluminium supply, with another 1-1.5 mmt being at risk of getting knocked off in coming quarters.

Similarly, for zinc, the supply cuts will affect production in Europe. Copper supply was affected by geopolitical issues in Peru, resulting in a deficit.

Meanwhile, the domestic demand growth is expected to remain favourable at 7-10% in the coming two years given the government’s push for infrastructure development besides demand from the renewables and electric vehicle sector.