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Global supply of non-ferrous metals such as aluminium, copper and zinc have increased at a faster rate as compared to the recovery rate in their demand.

Consequently, during Q1 of calendar year 2021, the markets of aluminium, copper and zinc were in surplus by 3 per cent, 4 per cent and 2 per cent, respectively, of their consumption.

As per an ICRA note, while consumption growth rates of these metals were strong at 8 per cent, 3 per cent and 10 per cent in this quarter, respectively, supply increased faster, due to the dual effect of partial normalisation of the supply chain and production from fresh capacities which were commissioned in China in the recent months.

The overall surplus market situation has been impacted further by the recent decision of the Chinese government to release its strategic reserves of aluminium, copper and zinc, reportedly at 0.8 million metric tonnes (MMT), 2 MMT and 0.35 MMT, respectively, which may significantly increase the availability of these metals, especially that of copper, in the physical market.

According to Jayanta Roy, Group Head and Senior Vice President, Corporate Ratings, ICRA, "Considering the large volume of metals that is available as Chinese strategic reserve, the current surplus in the market can be re-estimated as 4 per cent, 13 per cent and 4 per cent for aluminium, copper and zinc, respectively. Such excess availability of these metals over their demand would weigh on prices."

Over the last one year, international prices of the non-ferrous metals had witnessed a strong recovery from the lows witnessed post the onset of the Covid-19 pandemic to multi-year highs. While the prevailing surplus market scenario has resulted in some correction of 3-12 per cent in the last few weeks, prices are still higher by 16-60 per cent compared to their pre-pandemic highs achieved in January 2020.

Consequently, ICRA had said that the effect of the market surplus is perhaps yet to completely reflect on the price levels and some more corrections are expected hereon. Notwithstanding these corrections, absolute price levels would remain at a comfortable level for the domestic non-ferrous metals industry.

The improvement in non-ferrous metal prices coupled with a correction in input costs has supported the consolidated operating margin of the domestic industry, which is estimated to have improved to a strong 22 per cent in FY2021 from 13 per cent in FY2020 and is projected at over 25 per cent in FY2022 despite the dip in prices. Superior margins have led to strong operating cash flows in the industry, thereby leading to an improvement in the credit profile of the industry.

However, downside risks remain as the macro-economic uncertainties due to the Covid-19 pandemic are yet to dissipate with multiple waves of infections affecting the globe, ICRA said.

The total indebtedness of the domestic manufactures is currently high, with a consolidated debt of almost Rs 63,600 crore drawn to fund the large capacity expansion projects commissioned in the past.

On the back of buoyant metal prices, the prevailing scenario provides an opportunity to the industry now to deleverage the balance sheets before the next commodity down-cycle kicks in.

Moreover, with an improvement in operating profits, the debt coverage indicators would improve, with a projected total debt/EBITDA of 1.5 times and interest cover of 7.6 times during FY2022 from an estimated total debt/EBITDA of 2.5 times and interest cover of 4.5 times in FY2021 and total debt/EBITDA of 5.2 times and interest cover of 2.3 times in FY2020.

"The favourable price-cost regime would continue to result in a steady improvement in the credit risk profile of the domestic industry," added Roy.