International base metal prices plunged by up to 32% between March and July as growing concerns over a slowdown in demand in Covid-hit China put a damper on commodity prices that had soared immediately after the war in Ukraine at the end of February.

Rising interest rates in advanced economies are also weighing on commodity prices. However, given low inventory levels at major warehouses, base metal prices are unlikely to decline further in the near term, analysts said. As price moderation puts pressure on the margins of domestic base metal producers, user industries benefit.

Compared to March, aluminum prices on the London Metal Exchange (LME) fell 32% in July, copper 26% and zinc 22%. The hot rolled coil (HRC) benchmark price of steel products also fell 19% in the domestic market. Year-over-year, prices for all base metals are also down in July.

Going forward, in the medium term, a major upward movement in prices is also not expected due to recession fears (in the US and EU), said Hetal Gandhi, director of Crisil Research.

Of course, the fall of the rupee against the dollar canceled out some of the gains for Indian importers thanks to the easing of commodity prices. As a result, domestic producers, particularly of steel, managed to retain some pricing power. Iron ore prices are also down 36% in July from March.

Along with falling prices, high electricity costs kept pressure on aluminum manufacturers’ margins. In the first quarter of FY23, Vedanta’s cost of aluminum production increased 22% quarter-on-quarter to $2,653 per ton. Earnings from Hindalco’s Indian business would be under pressure in the near term due to the falling LME and high energy costs, Parbhudas Liladhar said recently. Margins at Hindustan Zinc, the country’s largest zinc producer, are also likely to come under pressure as the sector is energy-intensive. Electricity is now more expensive due to high thermal coal prices.

“Margins for base metal producers will be squeezed to some extent due to the price drop seen so far in the current year. In addition, players will also face cost pressures as they buy coal from the market due to rising coal prices. However, players will be relieved as they will have access to bond coal from Coal India or captive mines,” said Jayanta Roy, Group Head, Corporate Sector Ratings, ICRA.

For aluminum, the cost of production ranged between $1,400 and $1,800 per ton in fiscal year 2022, while for zinc it ranged between $1,000 and $1,200 per ton.

“Although lower metal prices will impact profitability, we expect Indian players to still earn adequate profits due to their low-cost position, particularly aluminum and zinc makers, as most Indian manufacturers are partially or fully integrated backwards, thanks to their access to mines.Although a rise in coal prices increases electricity costs for players, most have secured the supply of coal either through linkage or through electronic auctions.

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The profitability of Indian copper players, however, is less dependent on metal prices as it is largely refiners who import copper concentrates due to low access to mines,” Gandhi said.

On the steel front, hot rolled coil prices fell by 19% to Rs 59,250 per ton in July from Rs 73,500 per ton in March. Given weak domestic demand and exports, steel mills are resorting to price cuts almost every week. As of August 17, the price of HRC in the Mumbai wholesale market stood at Rs 57,300 per ton.

Steel exports have been steadily declining since the government imposed 15% export duties in May this year.

Steel mills are currently not fully utilizing their capacity, as inventories have accumulated. They expect the government to withdraw export duties soon, which will ease the situation.

Meanwhile, while zinc prices rose sequentially by around 15% in the first half of August 2022, copper and aluminum prices improved by around 3-5%.

“The sharp rise in the price of zinc is mainly due to the reduction in supply in Europe amid soaring energy prices,” said Sumit Jhunjhunwala, sector manager (corporate ratings) at the ICRA. He attributed the slight increase in aluminum and copper prices to the opening up of China.