The agency said this in a report published on Thursday based on a comparative analysis of business and financial indicators over FY16-FY20 for key industry players in the base metals sector highlighting their relative strengths amid a subdued sector performance in FY20.
Ind-Ra said the onset of a downturn for the sector was witnessed in FY20 with a slowdown in the global automobiles sector and continuing US-China trade war, leading to a gradual decline in base metal prices. Acute demand disruptions led by the COVID-19 outbreak since mid-December 2019 has led to a sharp decline in realisations amid the oversupply in the market, the report said.
Average monthly realisations for aluminium, copper & zinc had reduced 17%-18% up to April 2020 from the pre-COVID levels in December 2019.
As some of the economies resumed operations with the relaxation of lockdown norms, the realisations have picked up over the last two months by 6%-7% for aluminium and zinc and by 14% for copper in June 2020 in relation to April 2020.
However, considering weak sector fundamentals indicating an oversupply in the market, improvement in realisations has largely been driven by sentiments and prices are likely to remain subdued in the near term.
Within the sector, Ind-Ra expects domestic aluminium prices to remain under pressure in FY21, on a weak end-user demand and surplus market supply, while zinc & copper prices are likely to have a strong floor at the current prices levels.
Ind-Ra said it expects the operations of sector companies to be severely impacted in FY21, led by a continuing subdued demand. “While the revenues may decline at least 20% yoy, the absolute EBITDA could fall around 35% yoy. Though the utilisations levels are likely to be high, the operating margins will be subdued due to a high share of export market sales in the revenue mix and low physical premiums,” the agency said.
“Though the COVID-19 outbreak had weighed down on the players’ 4QFY20 operational performance, their credit metrics have remained resilient due to their low leveraged balance sheet and low-cost industry position,” the report added.
