ICRA

ICRA Sector Analysis

COPPER The Indian Copper Industry
May 2005 ICR Industry Comment

www.icraindia.com

Industry Comment

The Indian Copper Industry

Contacts: Rajeev Thakur Amul Gogna Date

Research Head Executive Director May 2005

Copyright, ICRA Limited, 26 Kasturba Gandhi Marg, New Delhi – 110001 None of the information contained in this publication may be copied, otherwise reproduced, repackaged, further transmitted, disseminated, redistributed, or resold, or stored for subsequent use for any such purpose, in whole or in part, in any form or manner or by means whatsoever, by any person without ICRA’s prior written permission. All information contained herein has been obtained by ICRA from sources believed by it to be accurate and reasonable. Although reasonable care has been taken to ensure that the information herein is true, such information is provided ‘as is’ without any warranty of any kind, and ICRA in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information. All information contained herein must be construed solely as statements of opinion and ICRA shall not be liable for any losses incurred by users from any use of this publication or its contents. In the course of work, ICRA may have received information from companies being rated or graded. However, this publication does not contain any confidential information obtained by ICRA in the process of rating or grading. This publication contains data/information available only in the public domain or available through secondary sources. Opinions expressed in this publication are not an indication of prospective rating/grading for any instruments to be issued by any of the companies concerned.

Report by ICRA Information, Grading & Research Service

2

Industry Comment

The Indian Copper Industry

T ABLE OF CONTENTS
The Indian Copper Industry: Porter's Model..............................................................................4 Background and Industry Structure...................................................................................5 Key Issues facing the players..............................................................................................6 Production, Consumption, price, capacity utilisation..........................................................8 Demand Supply Position ....................................................................................................9 Review of Performance...................................................................................................... 10 New Projects..................................................................................................................... 11 Outlook (Immediate to Medium term)............................................................................... 12

Report by ICRA Information, Grading & Research Service

3

Industry Comment

The Indian Copper Industry

T H E I N D I A N C O P P E R I N D U S T R Y : P ORTER ' S M ODEL
Threat of Substitutes: Medium to High Copper faces competition from other metals like Aluminium and also experiences shifts in market preferences due to drastic changes in technology (eg. Fixed line to wireless)

Bargaining Power of Supplier High with respect to Secondary producers who do not have captive mines Low with respect to Primary producers who have captive mines Inter Firm Rivalry Low: Medium Existence of just 3 major players limits market competition. However, declining domestic market enhances competition level.

Bargaining Power of Buyer Low: Medium Fragmented nature of the buyer industry results in limited bargaining power of buyer. However, drastic technological changes is affecting behaviour of key buyer i.e. Telecom segment.

Barriers to Entry: High Capital cost and ownership of copper mines are key entry barriers. Cost of Hindalco’s copper Plant = Rs.18.5 bn.

Report by ICRA Information, Grading & Research Service

4

Industry Comment

The Indian Copper Industry

BACKGROUND

AND

I NDUSTRY S T R U C T U R E

Copper is a special metal for industrial applications owing to its properties such as electrical conductivity, corrosion resistance, ductility, malleability and rigidity. Specific applications of copper include power cables and wires, jelly filled cables, building wires, air conditioning and refrigeration tubings. Telecom, Power, Construction, Transportation, Handicrafts, Engineering, Consumer Durable, Defence. The Indian Copper Industry was opened for private Sector investment in 1992. Earlier the industry was dominated by Hindustan Copper Limited (HCL), a public sector undertaking.
th HCL was incorporated on 9 November, 1967 as a public limited company under the Companies Act, 1956, with the objectives, inter alia, to carry out mining operations and produce copper and related products. HCL subsequently took over the copper ore mines from National Mineral Development Corporation Ltd. These mines are located at Khetri and Kolihan in Rajasthan and Rakha Copper Complex in Bihar.

In 1972, the Government of India nationalized the Indian Copper Corporation Ltd. in Bihar and merged the same with HCL. In November 1974, HCL set up a copper complex in Khetri with a designed output capacity of 31,000 TPA of copper cathode. In 1982, HCL expanded its operation to Madhya Pradesh by developing the Malanjkhand copper mine. During 1990, as part of forward integration, HCL commissioned a 60,000 TPA continuous cast wire rod plant at Taloja in Maharashtra. HCL is the only vertically integrated copper producer in India engaged in a wide spectrum of activities ranging from Mining, Beneficiation, Smelting, Refining and Continuous Cast Rod manufacturing. HCL also produces Gold, Silver, Nickel Sulphate, Selenium and Telurium as by products. With economic liberalisation in the last decade, the industry was opened to the private sector. Sterlite’s Continuous Casted Copper Cathode (CCR) plant with an installed capacity of 12,000 tpa was set up in 1990, with imported technology and equipment from Continuous, Italy, and La Farga Lacambra, Spain, to manufacture CCR from copper scrap. Subsequently, Sterlite Industries Limited commissioned its copper smelter at Tuticorin in Tamil Nadu in November 1996. Indo Gulf Corporation commissioned its copper smelter in Gujarat in the second quarter of 1998 while SWIL Limited is currently implementing a copper scrap recycling plant. The Industry currently has just 3 major players (Sterlite, Hindalco and Hindustan Copper Ltd.). Other players include around 1000 SSIs, which are primarily involved in converting scrap into ingots. While HCL is the only primary producer, which mines and refines copper, Hindalco and Sterlite are secondary producers, who process indigenous and/or imported copper concentrate to produce end products like copper bars, rods and wires. The industry capacity is 477,500 tonnes against a market size of 290,000 tonnes in FY2004. The market had in fact increased by a modest 0.5% in FY2004. The Major producers account for a share of approximately 80% of the total copper consumption in the country. The balance is on account of imports and sales of smaller producers. The market share of the major players is shown in the following chart.

Report by ICRA Information, Grading & Research Service

5

Industry Comment

The Indian Copper Industry

Domestic Market Share

14% 44% 42%

Hindustan Copper Ltd. Sterlite Hindalco

Compiled by INGRES

This industry is highly dependent on the performance of and demand for products like power and telecommunication cables, transformers, generators, radiators and other ancillary components. Hence, its growth is closely linked to the country's economic and industrial growth. Although the industry is capital and power intensive, entry barriers are moderate. These basically relate to economies of scale, access to ore supplies and environmental issues. In India, copper reserves are mainly concentrated in Bihar, Rajasthan and Madhya Pradesh. Indian ore has a copper content of just 1.2-1.3% against the world average of 2-3%. The Indian Copper Industry has a moderate importance in the Indian Economy. While it has a number of applications across several sectors (such as Telecom, Power, Construction, Transportation, Handicrafts, Engineering, Consumer Durable, Defence etc.), its turnover is just around Rs. 35 bn. (0.2% of GDP). However, 40% of production is exported. The total employment in the sector is less than 0.04 mn. The duties on copper and copper products have been progressively reduced. In recent years, the custom duty was reduced from 35% in 2001 to 20% in the mini -budget announced in 2004. This was further reduced to 15% in July 2004 and to 10% in the Union Budget for 2005-06. Thi s has resulted in the duty differential between copper cathode and copper concentrate narrowing to 5% from 15% in January 2004. Government initiatives to boost the end-user segment (like Telecom, Power, Construction, Transportation, Engineering, Consumer Durable etc.) have not had a significant positive impact on the demand front. India has also entered into a Free Trade Agreement (FTA) with Sri Lanka, which has resulted in a large influx of copper and copper products at zero import duty from Sri Lanka. To reduce dependence on external sources and to ensure consistent supplies of good quality copper concentrate, both the secondary producers (Sterlite and Hindalco) have acquired copper mines. Sterlite acquired two copper mines in Australia through 100% of the equity of their holding company, Monte Cello Corporation, B V, Netherlands. Hindalco has also acquired two copper mines (Mount Gordon and Nifty) in Australia in 2003.

KE Y ISSUES
o

FACING THE PLAYERS

Changes in market demand: The Telecom sector is the major customer segment (accounting for 35-40% of demand) for the Copper industry in India. With the increasing shift from fixed line to wireless mode of communication, there is a threat for demand growth for copper from this segment. Also, in the fixed line

Report by ICRA Information, Grading & Research Service

6

Industry Comment

The Indian Copper Industry

communication, optical fibres offer strong competition to copper. Accordingly, the market size has remained stagnant during the last several years. o Disadvantages of Secondary Producers: Traditionally, the Indian players (with the exception of Hindustan Copper) did not have copper mines and accordingly used to import copper concentrate from the international markets and used to refine and smelt it in their domestic facilities. Off late, however they have acquired copper mines at overseas locations (primari ly Australia) and are sourcing a share of their copper concentrate requirements from these mines. As they still rely on overseas markets for copper concentrate, the profitability is strongly dependent on the international variation in Treatment Charges and Refining Charges (or TcRc charges which is defined as the difference between the Copper cathode prices and the copper concentrate prices). The TcRc charges have been declining during the past few months due to constraints in concentrate availability. The TcRc charges have in fact declined from 5.64 c/ lb at the beginning of the financial year FY2004 to 2. 56 c/ lb in Q4 FY2004, a drop of about 55% due to aggressive buying by Asian Smelters. During FY2005 also, TcRc charges were under pressure during the first three quarters. However, they have recovered in the fourth quarter. With firm copper prices and increased concentrate supply, the outlook for TcRc charges is positive for FY2006.

TcRc Charges (Cents/Lb)
12 10 8 6 4 2 0 April 2002 Compiled by INGRES April 2003 March 2004

Inspite of this disadvantage, Indian companies are still initiating operational efficiency improvement measures and are attempting to compete on productions costs. An example is the case of Hindalco’s copper division (Birla Copper), which already falls under the top quartile lowest cost copper cathode manufacturers. The company aims to improve its cost competitiveness further. The following chart shows the specific operational fronts where the company scores high over international competitors.

Report by ICRA Information, Grading & Research Service

7

Industry Comment

The Indian Copper Industry

Metal Recovery
98.50% 98.00% 97.50% 97.00% 96.50% Hindalco Huelva Gresik Naoshima Onsan San San Huley Nordeutsch 96.00%

Energy Consumption (MJ/T)
5000 4000 3000 2000 1000 0

Hindalco

Huelva

Onsan

Compiled by INGRES

P R O D U C T I O N , C ONSUMPTION ,
UTILISATION

Chagres

Hurley

PRICE , C A P A C I T Y

On the production front, the last few years have seen significant additions in capacities in India and accordingly the production has increased at a CAGR of 14.8% during the last three years. The domestic consumption, on the other hand, has remained stagnant. The surplus production is earmarked for exports. Strong demand for copper has resulted in steady rise in copper prices, which had earlier exhibited strong cyclicality.

Report by ICRA Information, Grading & Research Service

8

Industry Comment

The Indian Copper Industry

Demand Supply Scenario ('000 tonnes)
500 400 300 200 100 0 FY2001 FY2002 FY2003 FY2004 Production Demand

Compiled by INGRES

Copper Prices, LME (US$/tonne)
3500 3000 2500 2000 1500 1000 500 0 2003 Q1 2004 Q2 2004 Q3 2004 Q4 2004 Q1 2005 Apr-05

Compiled by INGRES

D EMAND S UPPLY P OSITION
The domestic market is in a Surplus position. As against a capacity of 4,77,500 tonnes, the domestic market size is just around 2,90,000 tonnes. The demand supply balance is expected to deteriorate further, as with the current expansion projects, the installed capacity for copper cathodes is expected to increase to 8,47,500 tonnes. However, the surplus position in the domestic market is not major concern for the Indian players because the Asian region has a deficit of around 2.6 mn. tonnes.

Report by ICRA Information, Grading & Research Service

9

Industry Comment

The Indian Copper Industry

Existing Future Capacity Capacity HCL Sterlite Hindalco Total 47500 180000 250000 477500 47500 300000 500000 847500

Compiled by INGRES

Surplus/(Deficit) - '000 tonnes
1000 500 0 -500 -1000 -1500 -2000 -2500 -3000

Asia India

2003 2004E 2005E 2006E 2007E

Compiled by INGRES

While Japan, India and Philli pines a surplus position, deficit regions comprise China, Taiwan, South Korea, Malaysia, Thailand and parts of Middle East.

R EVIEW

OF

P ERFORMANCE

The industry has shown a mixed performance trend in the past. While Sterlite and Hindalco’s copper division have shown strong performance, Hindustan Copper was making losses till FY2004. The earnings have also been significantly volatile for all the players. The margins of the companies were under pressure due to decline in international TcRc charges due to shortage in concentrate supply globally. However, with increase in concentrate supply, the TcRc charges are now on an upward trend. This is likely to be sustained in 2005. Other factors affecting profitability negatively include: Appreciation of Rupee against the dollar, Fluctuations in DEPB charges, and changes in market mix (shift from fixed line to wireless communication). Key Financial Ratios

Sterlite ROCE OPM

FY03 11.2% 12.8%

FY04 8.8% 9.4%

9M FY05 NA 9.41%

Report by ICRA Information, Grading & Research Service

10

Industry Comment

The Indian Copper Industry

FY04 Hindustan Copper ROCE OPM Hindalco div.) ROCE (Copper FY03 16.00% 11.2% 12.5% FY03 -16.70% -13.40% 0.26% 2.02% FY04

9M FY05 NA 18.32% FY05 6.7% 8.6%

OPM 18.00% Compiled by INGRES

N E W P ROJECTS
Sterlite: Sterlite Industries (India) Ltd. (SIIL) is currently expanding the Tuticorin complex for an estimated total cost of Rs.3,713 million (US$ 81.4 million). The expansion will increase smelting capacity at Tuticorin to 300,000 tpa of copper anode. A 127,000 tpa copper refinery is being built on the Tuticorin site, which will have the same design and technology as the Silvassa refinery. In addition, an existing copper rod plant will be relocated from Silvassa to Tuticorin. A captive power plant of 22.5 MW is also being constructed as part of the expansion and this, together with a further 10 MW generated from the smelter waste heat boiler and the supply from the existing power plant, is expected to meet most of the complex's power requirements and reduce power costs on a per unit basis. The total capital expenditure over the three years ending 31 March 2006 at Tuticorin and Silvassa is estimated at Rs.4, 391 million (US$ 96.2 million) and at CMT and TCM at A$8 million (US$ 5.9 million). Sterlite has applied for the necessary environmental permits to operate the Tuticorin complex at the expanded capacity. These permits are in process. Hindalco: The brownfield expansion in Copper business to double its capacity from 250,000 TPA to 500,000 TPA is on schedule. The commissioning trials at the new plant have already begun and commercial production is likely to commence soon. On completion, Birla Copper will become the world’s largest custom smelter at a single location. It will catapult Hindalco into the league of the “Top-10 copper producers in the World”.

Report by ICRA Information, Grading & Research Service

11

Industry Comment

The Indian Copper Industry

O U T L O O K (I M M E D I A T E

TO

M EDIUM

TERM )

Global copper consumption growth in 2005 is likely to be in the 2-3% range as compared to about 9% in 2004. The position of Copper concentrate is expected to be better, with increased production by the Copper mines. This coupled with positive outlook on copper prices is likely to have a positive impact on the TcRc charges and hence the margins of Copper smelters.

Global Demand Supply ('000 tonnes)
20000 15000 10000 5000 0 2001
Compiled by INGRES

Production Consumption

2003

2005E

In India the users segment such as winding wire, power cables, transformers industry and continued increased export of down stream products supporting higher Deemed Export sales help the copper sector chug along. However the industry is greatly disadvantaged as non-value added imports from Sri Lanka under the FTA continue to adversely impact the domestic sales. The prospects for the domestic market is negatively impacted due to negative Growth in Jelly Filled Telecom Cable (JFTC) segment (which accounts for 35% of the demand). Further, fall in prices of Optic Fibres is dampening the outlook for JFTC. The industry is also disadvantaged as non-value added imports from Sri Lanka under the FTA continue to adversely impact the domestic sales. Other Segments help in expectation of slight recovery in the domestic demand. For example, –Growth in Winding wi re and Transformer Industry has offset to some extent the negative impact. –Increased Exports of Downstream products from India continue to support higher Deemed Export sale. –Expectation of adequate Monsoon and Power sector reforms give hope of good demand ahead Also, the average per capita consumption in India at 0.5 kg is relatively lower as against world average of 3 kg. Overall the domestic market is expected to grow in the 3-5% range. The Exports market however looks promising, as the Asian region has a deficit of around 2.6 mn. tonnes.

Report by ICRA Information, Grading & Research Service

12

Industry Comment

The Indian Copper Industry

CORPORATE & REGISTERED OFFICE

ICRA Limited
Kailash Building, 4 th Floor 26, Kasturba Gandhi Marg New Delhi 110001 Tel. : +(91 11) 2335 7940-50 Fax : +(91 11) 2335 7014, 23355293 Email : icrainfo@icraindia.com Website : www.icraindia.com

Report by ICRA Information, Grading & Research Service

13