The pandemic-induced slowdown in the Indian economy is likely to result in a steel demand contraction of 10-15 percent in the fiscal year 2020-21 (started April 1, 2020) with government-led spending necessary for a demand revival, India Ratings and Research (Ind-Ra) said in a report on impact of Covid-19 on the domestic steel industry.
To compensate for the low domestic demand, Indian steel producers are looking to cater to the export market and ex-India steel products’ price competitiveness may seem to have improved with lower iron ore prices compared to international iron ore prices, the Ind-Ra report stated. According to the agency, Chinese steel producers’ cost of production has been going up due to high raw material costs. There seems to be short-term opportunities for Indian companies to cater to Asian markets.
Ind-Ra expects steel prices to undergo a correction during the current fiscal year, with an inventory buildup especially in intermediate products, with downstream facilities of most primary steel producers being shut down during the lockdown period. However, there could be certain temporary periods when prices may receive support due to lower production levels limiting supply as economic activities resume.
Steel producers will find some respite from subdued raw material prices, both iron ore and coking coal. With supplies exceeding demand in the seaborne coking coal market, prices are likely to remain low, Ind-Ra noted.
The agency expects Indian steel companies’ sales and profits to bottom out during the first half of the current fiscal year due to the lockdown during the first quarter and the seasonally weak second quarter. Earnings before interest, tax, depreciation and amortization (EBITA) are expected to decline by 20-30 percent in the fiscal year 2020-21.
Ind-Ra anticipates that the flat product segment, which was already facing headwinds prior to the lockdown, is likely to be more impacted by the pandemic than the long product segment, led by weak demand conditions in end-use industries such as automobiles, consumer goods and white goods due to consumers delaying discretionary expenses. Conversely, long product segments could see better demand as accelerated government spending on infrastructure would provide an impetus to end-use industries.
However, the key issue would be supply-chain disruptions and labor availability and the labor retention policies of each state would be critical to ensure minimum disruptions in manpower availability, the agency report said.