ICRA

ICRA Sector Analysis

COPPER
The Indian Copper Industry

ICR
May 2005

Industry Comment

www.icraindia.com
Industry Comment The Indian Copper Industry

Contacts:
Rajeev Thakur Research Head
Amul Gogna Executive Director
Date May 2005

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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

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 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 Bargaining Power of Buyer

High with respect to Secondary Low: Medium
Inter Firm Rivalry Low: Medium
producers who do not have Fragmented nature of the
captive mines Existence of just 3 major players buyer industry results in limited
Low with respect to Primary limits market competition. However, bargaining power of buyer.
producers who have captive declining domestic market enhances However, drastic technological
mines competition level. 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.

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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.

HCL was incorporated on 9th 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.

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Industry Comment The Indian Copper Industry

Domestic Market Share

Hindustan Copper
14%
Ltd.
44% Sterlite

42% 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 FACING THE PLAYERS

o 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 April 2003 March 2004

Compiled by INGRES

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.

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Industry Comment The Indian Copper Industry

Metal Recovery

98.50%
98.00%
97.50%
97.00%
96.50%
96.00%

Hindalco

Huelva

San
Gresik

Onsan
Naoshima

Huley
Energy Consumption (MJ/T)

5000
4000
3000
2000
1000
0
Hindalco
Huelva

Nordeutsch
San
Onsan

Hurley
Chagres

Compiled by INGRES

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

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.

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Industry Comment The Indian Copper Industry

Demand Supply Scenario ('000

tonnes)

500
400
300 Production
200 Demand
100
0
FY2001 FY2002 FY2003 FY2004

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.

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Industry Comment The Indian Copper Industry

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

Surplus/(Deficit) - '000 tonnes

1000
500
0
-500
-1000 Asia
-1500
India
-2000
-2500
-3000
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

FY04 9M
Sterlite FY03 FY05
ROCE 11.2% 8.8% NA

OPM 12.8% 9.4% 9.41%

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Industry Comment The Indian Copper Industry

FY04 9M
Hindustan Copper FY03 FY05
ROCE -16.70% 0.26% NA

OPM -13.40% 2.02% 18.32%

Hindalco (Copper FY04 FY05
div.) FY03
ROCE 16.00% 11.2% 6.7%

OPM 18.00% 12.5% 8.6%

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”.

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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 Production
Consumption
5000

0
2001 2003 2005E

Compiled by INGRES

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.

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 Industry Comment The Indian Copper Industry

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