Ind-Ra keeps negative outlook for base metal sector in FY 18 10/03/2017 00:05

Ind-Ra keeps negative outlook for base metal sector in FY 18
10/03/2017 00:05
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India Ratings and Research (Ind-Ra) maintained its negative outlook for the base metal sector for next fiscal as new capacity expansion amid weak demand is likely to create surplus stocks, putting pressure on premiums, reported PTI. However, a sharp rise in coal prices globally had a positive impact on base metal prices, though metal consumption growth weakened worldwide, it said in a report. The implementation of large infrastructure projects takes substantial time and may not mean an immediate increase in demand. The positive sentiment arising from high infrastructure spending may be short-lived, it added. China, which accounts for 45-50 per cent of the global consumption of base metals, has registered weakened growth in the consumption of base metals, said the agency. The balance sheets of companies were substantially affected in the last two years due to a significant decline in metal prices amid growth in capex, it said. Although new capacity expansion will take full effect in FY18, such players will face margin pressure due to excess capacity and competition in export markets, Ind-Ra added. The aluminium capacity in India is likely to double in FY18 on account of new capacity ramp-up. Although domestic aluminium demand is likely to improve, given the size of new capacity addition, large volumes will have to be pushed in low-margin yielding export markets, it said. The addition of new, efficient capacity, which benefits from low power costs, by China and Saudi Arabia will recalibrate the cost structure in the sector and, therefore, prices, it said. Meanwhile, in the domestic demand for base metal is expected to remain stable with an upward trend in FY18, mainly supported by infrastructure spending by the government. The key end-user industries of base metals like automobile, infrastructure, electricals and equipment manufacturing are likely to register steady demand growth, while demand from real estate sector would decline. The companies are likely to generate higher free cash flow, driven by higher average metal prices and an increase in available capacity, it said adding the cost, working capital and capex savings may continue to support this cash flows. The agency expects steady average energy costs in FY18, as the coal prices worldwide are likely to decline during the period. However, these uplifts to free cash flows may be offset by weaker physical premiums, higher working capital requirements and dividend payouts, Ind-Ra added.

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