"The COVID-19 pandemic has not only impacted metal consumption, but it has also disrupted mining activities, which would restrict availability of the metals in the physical market going forward," ICRA Ratings Senior Vice-President and Group Head (Corporate Sector) Jayanta Roy said.
He added that the prevailing buoyancy in prices is a result of the markets factoring in this disruption.
ICRA expects that in 2020, consumption of these metals would contract significantly, ranging from 3-4 per cent for copper and zinc and up to 8 per cent for aluminum on a year-on-year basis.
Meanwhile, the movement in non-ferrous metal prices since the outbreak of the pandemic has followed three distinctive phases -- the first phase being in January when prices crashed 7-10 per cent in 10 days after the news on the outbreak of COVID-19 in China came to light.
Subsequently, the prices stabilised in February, although at a lower level, as the reported number of fresh cases in China declined.
As the virus started spreading, global macroeconomic sentiments turned negative once again, and the second phase of correction was witnessed when the prices crashed by 15-20 per cent in March and April.
Metal prices have since recovered by 10 per cent, 13 per cent, and 27 per cent for aluminium, zinc and copper, respectively, in the last two months, the report said.
The extent of recovery has varied factoring in the evolving demand-supply dynamics of the respective metals.
Global mine supplies were severely impacted in March to May, which would result in lower metal production in the subsequent periods, it said.
Consequently, while the markets of these metals are estimated to have been in large surpluses during the first half of 2020, the situation may change in the second half of the year as supply reduces, thereby narrowing the surplus in the physical market, it added.
Additionally, the prevailing metal prices may also have received support from financial deals on the metals.
Such deals have turned lucrative under the current market dynamics, on the back of abundant liquidity in global markets.
Globally, construction and transportation sectors are major demand drivers of the three non-ferrous metals and these sectors are strongly correlated with the health of the underlying economies.
With the outlook of the global economy turning adverse because of the pandemic, demand outlook of the base metals in turn is negative.
Consequently, sustainability of prices at current levels is doubtful based on fundamentals, ICRA said.
The y-o-y correction in international non-ferrous metal prices and the expected large-scale slowdown in demand would impact the credit metrics of the domestic primary non-ferrous manufacturers, it said.
However, a simultaneous correction in input costs would support business margins to an extent, it added.
The domestic manufacturers would also receive an additional support from the depreciation of the rupee against the US dollar.
ICRA notes that contrary to the prevailing sentiments, the depreciated rupee has strengthened domestic copper prices by over 7 per cent as on date compared to levels prevailing a year ago.
However, custom copper smelters would be impacted by a correction in copper treatment and refining charges by 29 per cent in the past three months, the report said.
The outlook on the domestic primary non-ferrous industry remains negative, notwithstanding the recent recovery in prices, ICRA added. SM HRS