The copper industry in India, which was healthy a year ago, is now in a bind, given the output constraints, lower realisations and higher costs. Apart from the ongoing trade tensions between the US and China that are exerting pressure on metal companies, there are other worries for the country’s copper industry.
The shutting down of Vedanta’s Sterlite copper plant — which contributed 40 per cent of the country’s output — has changed the copper dynamics in the country. Further, the reduction in global mining output led to the fall of treatment charges and refining charges (Tc/Rc), dragging down the revenues of copper smelter owners in India.
Here’s a glimpse of what happened in the copper industry and how it impacted the two major domestic players, Vedanta and Hindalco, over the last year
Skewed dynamics
The closure of the Sterlite copper plant in Tamil Nadu, on account of environmental pollution issues, resulted in a sharp rise in imports last year, raising concerns over future imports and demand for products from local players.
India had been self-sufficient in refined copper production and has emerged a net exporter of the metal over the years. Production of such copper fell 34 per cent y-o-y to 509 kilo tonnes in January-November 2018. With consumption increasing at 5-6 per cent, there was a supply deficit within the country that had to be fulfilled by increasing imports.
Output was also hit by the lower volumes produced by Hindalco on account of a planned maintenance shutdown for around two months in the first half of FY19.
In the first ten months of 2018, imports rose threefold to 62 kilo tonnes, and exports plummeted 66.9 per cent to 109 kilo tonnes, against the same period the previous year, turning India into a net importer of the metal, from being a net exporter earlier.
Imports are expected to grow at a higher rate if the Sterlite plant is not re-opened. The Supreme Court recently refused to allow the reopening of the plant as allowed by the National Green Tribunal (NGT).
Fall in prices, a dampener
The non-availability of copper concentrate in the global market moderated the Tc/Rc charges in the last couple of years. Production happens in three stages. Copper ore (from mining) – copper concentrate – refined copper (using smelters).
Though India’s refining capacity of copper is close to 1 lakh tonnes, the metal mining capacity supports only 35 per cent of it. Therefore, producers such as Vedanta and Hindalco import the concentrate from global miners and earn treatment and refining charges (Tc/Rc) from their refining divisions.
Movement of Tc/Rc charges is based on the global production of copper ore. If production is high, demand for refining increases and the Tc/Rc charges rise too. A recent report by Yes Securities says that global treatment charges slumped to $79 a tonne last December, from a high of $105 per tonne in 2016.
The London Metal Exchange (LME) prices of copper also plummeted in the last year, in the wake of trade tensions between the US and China, the top producer and consumer of the metal.
In line with the prices of all metals, the copper LME and MCX prices fell by about 17 per cent and 12 per cent respectively in 2018.
Poor performance of companies
So far, in FY19, the performance of domestic players has not been impressive. While the copper plant of Vedanta remains closed, Hindalco’s copper unit is under pressure,because of lower volumes and declining realisations.
Hindalco’s operating profit for the nine months ended December 2018 was ₹1,210 crore, down 5 per cent from a year ago.
To be immune from the volatility in the LME and the Tc/Rc charges, Hindalco is increasing its focus on value-added products such as CC rods. In the recent December quarter, the share of CC rods in sales went up to 58 per cent from 40 per cent last year. It helped the company boost revenues by 4 per cent yoy during the said quarter, despite fall in volumes and realisations.
Increased realisations from by-products such as sulphuric acid and DAP (di-ammonium phosphate) aided the rise in revenue. But this failed to translate into similar growth in earnings, owing to the higher input costs of coal and fuel.
Going forward, rise in Tc/Rc due to expected increase in ore output, globally, will help improve the situation, and may come as a reprieve to the troubled companies.