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Copper miners laughing their way to the bank as consumers bleed
The unpredictability of crude oil and its impact on consumers are all too well known. Far less is said of copper, whose prices too have gone through the roof in recent months.
The red metal has in fact been on a roll since bottoming out at $6,037.50 per tonne on the London Metal Exchange on June 7, 2010. It closed the year at an all-time high of $9,687 a tonne and made a new high of $10,150 per tonne on Monday.
Copper consumers are predictably in a tizzy, while integrated players and producers are making good profits.
The crude oil parallel still holds: downstream players make losses while the upstream players are cash rich.
“Among the three Indian producers of copper —- Hindustan Copper, Hindalco and Sterlite —- Hindustan Copper being an integrated producer with captive mines is likely to benefit the most,” said Jayanta Roy, senior vice-president, corporate sector ratings, ICRA Ltd.
Roy said the recovery of global demand has led to a sharp increase in copper price, and this would adversely impact the major user industries like electrical equipment, cables and automobiles.
A series of developments coinciding with global recovery has led to a heating up of the red metal, denting the margins of consumers who use it for making end products.
“With the launch of the physical electronically traded funds (ETFs) in the fag end of 2010, there was a scramble among players to hoard the metal in physical form. This led to a tremendous rise in demand and hence the spiralling prices,” said Ramesh Iyer, vice-president, product development, National Commodity and Derivatives Exchange Ltd (NCDEX).
Besides, said Iyer, no new mines are reported to have been found or allotted to copper producing companies the world over. This has also added to the mismatch in demand and supply.
“The current deficit world over is between five and six lakh tonne,” he added.
An official note sourced by DNA from Indian Electrical and Electronics Manufacturers Association (IEEMA), the prime industry body for the electrical sector, said there are five major sectors that use copper: power and control cables, transformers, rotating machines, switchgears and meters. Together, this industry is worth an estimated Rs52,000 crore, while the value of copper consumed by it is pegged at Rs13,000 crore.
“Percentage increase in copper price from 2009-10 average to Q3 2010-11 was 18.9%, which translates into more than 3% of industry’s last year turnover, which operates on a thin margin due to stiff competition,” the note said.
IEEMA president VP Mahendru said while there is definitely some effect on copper consuming players, those who depend on government contract are shielded to a large extent. “We have price variation clause in the contract so many players are insulated from the volatility, but for common people, it does have an impact.”
However, intermediate players like Sterlite and Hindalco, which import copper concentrate and then refine it to form copper cathodes, are the safest lot.
Ravindra Deshpande, analyst with Elara Capital, said these companies work typically on treatment and refining (Tc/Rc) margins, which change in tandem with the input and the output price.
“Hindalco and Sterlite being primarily non-integrated smelting-refining companies, the upside is likely to be limited by the increase in their raw material costs, despite an improvement in Tc/Rc rates at present,” said Roy from ICRA.
However, a source close to one of these companies, said that refiners usually benefit with higher prices as their everyday Tc/Rc charges go up. “Unless substitution of copper happens, the prices will stay firm for at least a year,” he said.
Thus, high copper prices are a bane for the electrical industry and a boon for integrated players like Hindustan Copper, while companies such as Sterlite and Hindalco don’t have much to lose or gain —just as in the oil industry where upstream players gain, downstream players lose and those midstream are safe. Unfortunately, however, there is no subsidy here for the weakest link.