India Ratings and Research revises outlook for aluminium to negative in FY17

Weak demand, import pressure and declining prices are impacting the non-ferrous metals market, India Ratings and Research (Ind-Ra) said adding the outlook for such metals is negative for the next fiscal. Ind-Ra has revised the outlook on the non-ferrous metals sector to negative for 2016-17, from stable for 2015-16, it said in a statement.

"The agency has also revised outlook on sector companies to Negative for FY 2016-17, from Stable in FY 2015-16. It expects the sustained deterioration in metal prices from current levels to be the key driver of possible rating downgrades," it added.

Although industry players have been maximising free cash flows with cost control and a reduction in working capital cycles, weak demand growth, import pressure, low physical premiums and sub-optimal capacity utilisation are likely to delay deleveraging, the agency said.

Prices of major base metals, including aluminium declined throughout April-December 2015. Current futures market being in sluggish phase indicates a continued negative sentiment on the price outlook, it said. This is despite a substantial decline in the stock-to-use ratio. This means prices have fallen despite a tighter physical market, it added.

China, which consumes 40-50 per cent of the global major base metals, is facing an economic slowdown. This means a surplus in the global market and therefore a delay in price recovery, Ind-Ra said. For domestic players, slowing Chinese economic growth implies increased competition from low-cost imports into India as well as competition in the export market, it added.

"Ind-Ra expects industry to focus on controlling costs to protect operating margins. Industry players would continue to optimise production processes, postpone growth capex and suspend unprofitable production lines," it said. The agency added it expects imported alumina to continue to replace domestic alumina due to price difference between the two.

It also expects non-integrated players in aluminium sector to record improving operating margins. "Ind-Ra believes the weak domestic demand growth and surplus capacity could lead to low capacity utilisation in 2016-17 fiscal. This is despite the agency's expectation of a moderate pick-up in consumption growth during second half of FY'17," it said.

For aluminium, Ind-Ra said near-term imports into India are likely to remain steady, with excess capacity in China. Efficient new capacities in China as well as low alumina and energy costs have recalibrated the cost curve globally.