Recovering prices for non-ferrous metals to boost import substitution in Russia

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Cameron Gilbert
6 years ago
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1 CORPORATE SECTOR METALS FORECAST Aluminum market not to regain a surplus until Copper prices will see a correction to 6,2 USD/t Zinc market may regain equilibrium not earlier than by Supply shortage in the nickel market to continue until Creditworthiness of n nonferrous metal producers will improve Methodology This forecast has been drawn up in accordance with the General Principles of Socioeconomic Indicators Forecasting. Evgeny Obydov Associate Director, Corporate Ratings Group +7 (495) evgeny.obydov@acra-ratings.ru Maxim Khudalov Director, Corporate Ratings Group +7 (495) maxim.khudalov@acra-ratings.ru Recovering prices for non-ferrous metals to boost import substitution in n non-ferrous metals market 221 outlook Global aluminum and zinc markets will experience shortage until , nickel market until 221. Low prices seen in have led to lower capacity utilization and shutdown of inefficient production facilities in the industry. Minimum surplus will remain in the copper market, but the outrunning consumption growth rates may result in a shortage after 221. According to ACRA estimates, the average prices in will be: 2,5 2,15 USD/t for aluminum, 6,2 6,3 USD/t for copper, 12, 12,5 USD/t for nickel, and about 3, USD/t for zinc. Metal prices are also supported by a 7.5% decline of the Broad Dollar Index in the first eight months of 217, as well as by growing investments of Chinese banks into commodities. Recovering prices for non-ferrous metals will exercise pressure on the s imports of rolled products. The share of imports in the domestic consumption of aluminum and copper is 25 3% (value-added products), zinc 15% (primary metal). According to ACRA estimates, localizing the production of rolled aluminum and copper may cause a 1 15% growth of EBITDA of n producers. Low utilization of n zinc production capacities is conducive for primary metal import substitution in the local market, which may result in over 15% growth in earnings. Creditworthiness of n non-ferrous metal producers will improve following the recovering prices for core products and the decreasing exchange rate of the n currency down to RUB/USD. According to ACRA estimates, the average growth rate of EBITDA margin of the largest n non-ferrous metals producers will be not less than 5 1 pps, with the most prominent growth (+1 15 pps) to be demonstrated by zinc producers. Natalia Porokhova Director, Head of Research and Forecasting Group +7 (495) natalia.porokhova@acra-ratings.ru Vladislav Pismenskiy Trainee, Corporate Ratings Group +7 (495) , ext. 149 vladislav.pismenskiy@acra-ratings.ru Contact for media Maria Mukhina Operating Director +7 (495) maria.mukhina@acra-ratings.ru

2 Table 1. Forecasted n and global non-ferrous metals industry indicators Indicator UoM Act. Est. Forecast Urals oil price USD/bbl RUB/USD exchange rate RUB/USD Global GDP USD billion 78,52 74,197 75,278 77,988 81,962 86,137 9,562 95,172 Population million 7,125 7,29 7,295 7,383 7,47 7,557 7,645 7,734 Aluminum, world USD/t 1,896 1,681 1,611 1,972 2,72 2,174 2,24 2,288 Produced, world million Consumed, world million Aluminum market balance, world Produced, RF Apparent consumption, RF Aluminum ingot, RF million RUB '/t, VAT excl. 3,4 3,5 3,613 3,729 3,849 3,972 4,1 4, Copper, world USD/t 6,83 5,493 4,87 6,121 6,226 6,327 6,445 6,558 Produced, world million Consumed, world million Copper market balance, world million Produced, RF Apparent consumption, RF Copper ingot, RF RUB '/t, VAT excl Zinc, world USD/t 2,167 1,938 2,11 2,865 3,39 3,23 2,929 2,767 Produced, world million Consumed, world million Zinc market balance, world million Produced, RF Apparent consumption, RF Zinc ingot, RF RUB '/t, VAT excl Nickel, world USD/t 16,951 11,877 9,648 1,53 12,5 12,471 12,937 13,495 Produced, world million Consumed, world million Nickel market balance, world million Produced, RF Apparent consumption, RF Nickel ingot, RF RUB '/t, VAT excl. Source: data: Bloomberg, RF Ministry of Industry and Trade, IMF; forecast: ACRA

3 Aluminum market not to regain a surplus until 22 Favorable price conditions will stimulate utilization of existing manufacturing capacities and reintroduction of suspended inefficient capacities (in China, ). The global shortage that emerged in the primary aluminum market in 216 have increased substantially in 217 and, according to ACRA estimates, it may reach about 1.5 million by the end-217. The shortage is caused by the shrinking output in China (connected with environmental issues), which declined faster than expected. ACRA believes that the 218 shortage will be not more than 1 million, and the market may regain its equilibrium by Figure 1. Primary aluminum: global market balance Production, Consumption, Balance, Price, USD/t, rha Source: Bloomberg, IMF, ACRA forecast Growing prices for energy coal resulted in a substantial growth in prime costs in China, caused by the increased prices for electric power. Declining stocks of primary aluminum at the key world commodity exchanges expected in will support prices for aluminum. According to ACRA estimates, the average price for aluminum will range within 2,5 2,15 USD/t in The price may be supported further by the expected growth of the prime costs in China, where up to 6% of the world aluminum output is produced. RUSAL s ambitious plans to increase production capacity (Boguchansk and Khakas projects, resumption of construction of the Taishet smelter) indicate an optimistic attitude in the domestic industry. At the same time, in ACRA s opinion, the expected price growth rate in the aluminum market may not be high enough to implement all the projects in full. Figure 2. Primary aluminum: n market balance Production, Consumption, Price (ingot), rubles, rha Source: RF Ministry of Industry and Trade, ACRA forecast 3

4 Localizing the manufacture of rolled aluminum may result in a 1 15% growth of EBITDA in the industry. is a net exporter of aluminum. Nevertheless, in 216, imported 264 of aluminum and aluminum products, which is about 3% of the domestic aluminum consumption. According to ACRA estimates, the value of imports amounted to RUB 46 billion, and the lost income of n producers amounted to RUB 16 billion. In ACRA s opinion, the main imported aluminum products (about 4% of the total imports), which may be produced locally, include sheets, plates, bars, extrusions, foil and consumer products. Copper prices will see a correction to 6,2 USD/t Shortage seen recently on the market was caused by short-term supply problems (strikes at Escondida in Chile and Grasberg in Indonesia), but the market has regained equilibrium by now. After the shortage seen in 216, the copper market have found an insignificant surplus (about 3 annually) in 217, which, according to ACRA estimates, will remain until 221. China will remain the main driver of world demand for copper, despite the slowing down consumption growth rate. A significant increase in demand is also expected from electric vehicle manufacturers. The supply growth, in turn, will be slightly behind the demand due to insufficient investments in the development of new deposits amid low prices observed in previous periods. This fact can lead to a shortage after 221. Figure 3. Copper: global market balance Production, Consumption, Balance, Price, USD/t, rha Source: Bloomberg, IMF, ACRA forecast According to ACRA estimates, the copper price growth up to 6,6 USD/t observed in 3Q217 is speculative, and a minor correction is possible in 4Q217. ACRA expects that the average copper price will be about 6,2 USD/t in 218 and it may grow up to 6,6 USD/t by 221. The load ratio of the largest n copper producers has been stably above 95% and will remain high in the forecast period. 4

5 Figure 4. Copper: n market balance Production, Consumption, Price (ingot), rubles, rha Source: RF Ministry of Industry and Trade, ACRA forecast Extending copper production in may increase EBITDA of n producers by RUB 5 billion. Century mine in Australia and Lisheen mine in Ireland with the total capacity of 675 were closed in 215. In 216, imported 7 of copper and copper products, which is about 25% of the domestic consumption. The value of imports is estimated by ACRA at RUB 3 billion. Given the growing price trend, there is a potential for import substitution, mainly copper pipes and fittings, whose share in imports is about 16% and 18%, respectively. Zinc market may regain equilibrium not earlier than by 219 Since 216, the zinc market has been experiencing a significant shortage of supply (about 3 in 216). In ACRA s opinion, the shortage may reach 7 in 217, or over 5% of the world consumption. The shortage is caused by the closures of unprofitable enterprises in 215 (more than 5% of the market) against the backdrop of the growing demand for galvanized steel in China. ACRA expects that the shortage of about 3 will continue in 218, but the market may reach an equilibrium as early as in 219. The main supply drivers may include an increased load of production capacities against the backdrop of a favorable price environment, and the expected introduction of new projects (for example, the Ozernoye zinc deposit with a capacity of up to 35 ). Figure 5. Zinc: global market balance Production, Consumption, Balance, Price, USD/t, rha Source: Bloomberg, IMF, ACRA forecast 5

6 ACRA expects that the zinc price will stabilize at the current level of about 3, USD/t in , with a potential minor correction after 219. The n zinc industry may benefit from the supply shortage seen in the world market, since the current average load ratio of production capacities is about 8%. ACRA expects that the capacity utilization in the industry could increase to 9-95% in Figure 6. Zinc: n market balance Production, Consumption, Price (ingot), rubles, rha Source: RF Ministry of Industry and Trade, ACRA forecast Import substitution in the domestic market may result in a 15% growth in earnings of n enterprises. In 216, imported about 37 of zinc and related products, or 15% of domestic consumption, while the share of raw zinc accounted for 92% in the total imports. For comparison, exports amounted to 58. Therefore, there are certain opportunities for import substitution, especially given the incomplete utilization of zinc production capacities in. Supply shortage in the nickel market to continue until 221 ACRA expects that the supply shortage seen in the nickel market in 216 will remain until 221. According to ACRA estimates, the shortage will be driven by closures of unprofitable enterprises, primarily in China, and closures of existing production facilities for environmental reasons. Consumption, in turn, will grow steadily, in particular, the growing demand is expected from manufacturers of stainless steel and batteries used in the fast-growing sector of electric vehicles. 6

7 Figure 7. Nickel: global market balance Production, Consumption, Balance, Price, USD/t, rha Source: Bloomberg, IMF, ACRA forecast According to ACRA estimates, prices for coking coal will be USD/t in See the ACRA November 7, 216 forecast titled Commodity prices recovery to shore up s metals & mining industry. Nickel supply shortage will drive a moderate increase in prices, which, according to ACRA estimates, will be 12, USD/t in 218 and may increase up to 13,5-14, USD/t by 221. Nickel prices may also be supported by rising prices for coking coal, which will sustain costs of nickel producers for coke at the level of 1-11 USD/t. Other factors that could affect nickel prices may include further restrictions on ore production in the Philippines for environmental reasons (nickel ore production in the country declined by 2% in 1H217). According to ACRA estimates, nickel stocks at the main commodity exchanges, having reached a historic high in , will decline by 3-5% annually in Figure 8. Nickel: n market balance Production, Consumption, Price (ingot), rubles, rha Source: RF Ministry of Industry and Trade, ACRA forecast The n domestic nickel market is self-sufficient, as the 216 imports of nickel and nickel products amounted to only 1.8 or about 7% of the domestic consumption. In turn, the 216 exports amounted to 23. 7

8 Creditworthiness of n non-ferrous metal producers will improve In ACRA s opinion, the current forecast for the n non-ferrous metals sector is moderately positive. Recovering metal prices will have a positive impact on the profitability and ability to generate cash flows in the industry. According to ACRA estimates, the EBITDA margin in the aluminum, copper and nickel segments may grow by 5 1 pps and in the zinc segment by 1 15 pps. The industry may get an additional support from a weakening ruble as, in ACRA s opinion, the exchange rate will reach 68 RUB/USD by 221. With that in mind, ACRA expects a significant improvement in the leverage demonstrated by the non-ferrous metals industry. Expanding import substitution will allow aluminum, zinc and copper producers to get higher revenues. Methodology This overview was drawn up using the scenario-based model developed by ACRA for the non-ferrous metals market. The model includes both the fundamental factors impacting the market supply/demand balance and developments and other factors reflecting the subjective opinion of ACRA. In ACRA s opinion, pricing in the non-ferrous metals market is driven by not only the supply/demand balance and the volatility of metal stocks at major world commodity exchanges, but also by the rate of US dollar, which determines the speculative demand for commodities. The consumption amounts were projected on the basis of the expected growth of the world economy, while the production outputs were estimated by ACRA depending on the expected commissioning/closure of production facilities for each of the above mentioned metal. 8

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