Moody's: Indian base metal industry to benefit from rising demand, raw material availability

Moody's Investors Service says that India's (Baa3 positive) base metals industry will benefit from increased demand, easing restrictions on raw material availability, and relatively low production costs.

Moody's analysis is contained in its just-published report "Base Metals -- India: Rising Demand, Better Access to Raw Materials to Benefit Domestic Industry", by Alan Greene, a Moody's Vice President -- Senior Credit Officer.

"We expect India's consumption of base metals to increase by 8%-10% annually over the next three years, driven primarily by demand from three sectors: power, construction and automotive," says Greene. "Our projections reflect domestic GDP growth--forecast at 7.5% in fiscal year 2016 and 7.6% in fiscal 2017--and the government's efforts to boost infrastructure spending."

Moody's notes that India's installed capacity for all three base metals--aluminium, copper, and zinc-- is sufficient to meet demand growth, having grown sharply over the past decade. However, the aluminium sector will become oversupplied as large expansion projects come online over the next three years.

That means aluminium manufacturers will continue to rely on exports to maintain high utilization rates, but increased demand for copper and zine will absorb some excess capacity, says the rating agency.

Vedanta Resources plc (Ba1 negative) through its subsidiaries Hindustan Zinc Ltd. (HZL, unrated) and Vedanta Ltd. (unrated) is well-placed to benefit from the expected growth in demand. In particicular, Moody's expects profitability to increase for companies with captive raw material sources and adequate scale--such as Hindalco Industries (unrated) and HZL--but smaller players such as Hindustan Copper (unrated) and National Aluminium Company (unrated) will be limited by scale and production capacity, respectively. Vedanta Ltd. is expanding its aluminium output, but its limited access to raw materials constrains its profitability, adds Moody's.

In addition, the Indian mines and mineral law that went into effect earlier this year aims to increase the availability of minerals and fuel sources for domestic metals companies. Prices for these materials should decline as a result and subsequently support metals manufacturers' profitability, notes the rating agency.

Finally, Moody's says that Indian companies' favorable cost structures insulate them against competitive threats. They will likely become even more cost efficient and profitable as their capacity utilization rates increase in response to growing domestic demand.