MUMBAI/THOOTHUKUDI, India - Indian electrical goods manufacturers will have to rely more on imported copper and are bracing for a rise in costs, after the government in Tamil Nadu this week ordered the permanent closure of Vedanta's copper smelter there.
Industry executives and analysts say this is likely to lead to an increase in prices of a wide range of products from power cables to electronic appliances, and televisions to auto parts, as manufacturers look to pass on the cost increases at a time when a weaker rupee and a surge in crude oil prices have put pressure on profit margins.
And while international copper prices are not expected to climb as a direct result of the closure in the next few weeks, if the plant is permanently shut there could be an impact.
"It may not impact straight away, but if it's a sustained shutdown, I'm talking more than a few weeks from here, then it will start to have a meaningful impact," said Daniel Hynes, senior commodities strategist at ANZ in Sydney.
India consumes 1.5 million tonnes of copper annually, half of which has been produced by two companies inside the country - Vedanta Ltd, a unit of London-listed Vedanta Resources, and Hindalco Industries, a unit of the Aditya Birla group. The remaining copper demand is met largely via imports.
On Monday, the state government in South India ordered the permanent closure of Vedanta's 400,000 tonnes copper smelter after protests last week led to the killing of 13 people.
"We are expecting an increase of at least 200,000 to 250,000 tonnes of copper imports for this year," said Shreegopal Kabra, managing director of RR Global, a wire manufacturing firm that is one of the largest consumers of copper in India.
IMPORT BILL SEEN CLIMBING
Copper import costs are also likely to rise by 5-15 rupees per kilogram, driven by strong demand and a weak rupee, said Kabra, who heads India's biggest electrical industry lobby group, Indian Electrical & Electronics Manufacturers' Association (IEEMA).
Among its emerging economy peers, the rupee has been one of the worst performing currencies against the dollar in recent months.
India is already struggling with inflation fears as the rise in oil prices has sharply lifted its import bill.
"We are expecting that the shutdown can lead to an increased import bill of over $2 billion," said an executive from Vedanta, who asked not to be named.
India's copper consumption, often seen as an economic barometer because it is used in many products - from electrical equipment to pipes - is expected to grow at a pace of more than 7 percent this year, in-line with the nation's GDP.
The landed cost of copper in India is 456 rupees per kg ($6.76) as of May 30, according to figures from commodity exchanges.
The metal is sold globally at the London Metal Exchange (LME) rate, but based on demand and tenure of a purchase deal, a premium is typically charged over the LME rate in India.
"The domestic premium is expected to rise along with imports of copper due to the shutdown," said Goutam Chakraborty, analyst with domestic broking firm Emkay Global.
He declined to say how much he expected this premium to rise.
Many companies will have to import copper via spot deals due to the sudden turn of events at Vedanta, said Milan Mehta, the managing director of Precision Wire.