Metal Firms Could See Contracted Margins In FY25 As Base Metal Prices Lower

Metal firms are likely to see lower margins in fiscal 2025 as the prices of base metals continue to fall, affecting revenue for these companies.

The base metal price of copper, aluminium, zinc, lead, nickel and tin surged in the range of 2.5% to 24% in the first quarter of fiscal 2025, benefiting metal companies. However, these prices have reversed in the second quarter and could maintain the weak trajectory till the end of the financial year, as per industry experts.

The sharp price momentum seen in base metals in the first quarter was based on several factors. The ban imposed by the United States and United Kingdom on trading metals originating from Russia, such as aluminium, copper, and nickel, started the price movement in March 2024, as per Systematix Research.

Furthermore, supply shortages helped sustain prices as demand kept rising.

Hindustan Zinc Ltd. expects subdued earnings in the second quarter of fiscal 2025 due to current price trends, according to Chief Executive Officer Arun Misra. No price increases are anticipated before the end of December 2023, he told NDTV Profit.

He remained cautiously optimistic for the last quarter of the financial year, pointing out that the conclusion of the US elections in November and the European elections in France and the UK by December might drive up prices due to anticipated boosts in infrastructure spending.

India is home to several major non-ferrous metal companies, such as Hindustan Zinc, Hindalco Industries Ltd., National Aluminium Co., Hindustan Copper Ltd., and Vedanta Ltd.

Typically, lower base metal prices adversely affect these companies by reducing selling prices, which leads to decreased revenue. Additionally, since production costs often remain stable, the companies' profit margins are squeezed.

The dollar index is down over 2.5% since July 2024, indicating a weak dollar when compared to other currencies. Usually, a weaker dollar leads to higher prices for metals since metals priced in dollars become cheaper for buyers using other currencies. This increases demand for metals from international buyers, driving up prices. However, that does not seem to be the case for the second quarter, as there are several geopolitical issues at play.

China is a major driver for commodities and has been "churning metal like there is no tomorrow,"  pointed out Rakesh Arora, managing partner at Go India Advisors. This has led to higher metal inventories across the world. If the demand for finished metal products doesn't keep pace with China's production, a surplus could eventually lead to price corrections.

Arora also pointed out trade barriers imposed by developed countries on China’s advanced renewable energy products. If China were to halt production, the rest of the world would lack the capacity to produce these products. As a result, the renewable energy trend that had been driving up copper and aluminium prices may be stifled, he said.

There is also big worry of increased taxation for metal counters, due to the new Supreme Court hearing on mining royalties, Arora said.

In July, the court overturned its 1989 hearing and held that royalties are not a tax, but a contractual payment. This allows Indian states to levy additional cess or taxes on companies with mining operations in the respective state.

If the new ruling is implemented retrospectively, companies that operate in the states of Odisha, Jharkhand and Tamil Nadu would be immediately impacted, according to Arora. Total hit in the state of Odisha itself would be of Rs 2 lakh crore. If the ruling is applied prospectively, metal companies would also see a margin impact, he said.

While the stock performances of metal companies have done very well when compared to global peers, valuations remain on the higher side, with no good earnings coming in, Arora said.

Current conditions are prime for valuations to get punctured lower and he advises investors to book profits till there is more certainty in the sector.