Sterlite closure may skew copper supply-demand dynamics

Sterlite closure may skew copper supply-demand dynamics, other players may not bridge the gap

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The Tamil Nadu Govt. on Monday issued a Government Order, directing the state Pollution Control Board to seal the Vedanta group’s copper plant and close it down ‘permanently’ following last week’s violent protests during which 13 people were killed in police firing.

Impact on copper industry in India

The shutting down of Sterlite’s copper plant, which is producing about 45 per cent of the country’s copper output, changes the demand -supply dynamics in the domestic copper market that could escalate the metal’s domestic prices. As per the annual report of the Minstry of mines for FY 2017-18, the key copper players have an installed capacity of around 9.5 lakh tonnes (Hindalco – 5 lakh tonnes, Vedanta – 4 lakh tonnes and Hindustan Copper – 0.9 lakh tonnes).

During the FY 2016-17, refined copper usage (including for cathode and wire rod) is around 6.5 lakh tonnes and as such it makes India a net exporter of copper. Sterlite has 35% market share in the country. With closure of Vedanta’s sterlite unit, India’s copper production capacity would be reduced to 5.9 lakh tonnes, thereby making India a net importer of refined copper from net exporter so far.

The copper prices which move in tandem with LME prices would shoot up in short term due to supply deficit within the country.

Impact on stocks

Hindalco and Hindustan Copper are likely to benefit from surge in domestic prices of copper. Though, the clsoure is likely to disrupt copper market, its impact on Vedanta’s stock is likely to be marginal as the copper segment accounts for only 4-5 per cent of company’s operating profit.

Hindalco (CMP Rs. 237 M Cap Rs. 53,274 crore  PE 9x FY20E)

Hind Copper (CMP Rs. 75 M Cap Rs. 7,000 crores  PE 75x FY19E)

Vedanta (CMP Rs. 250 M Cap Rs. 92,855 crores PE 18x FY20E)

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