Rating Agency ICRA has revised the steel industry outlook to negative from stable as back-to-back lock-down extensions are likely to lead in a severe slowdown in demand for steel, which is expected to plunge by 20 percent in FY21, ICRA said in a statement.
Jayanta Roy ICRA’s senior vice-president said, “The first half of FY 2021 is expected to be challenging for steelmakers. Many buyers could prefer to sit at the sidelines, given the uncertain demand environment and liquidity pangs of steel consumers, amid dwindling sales and fixed cost obligations.”
According to the latest ICRA report on the sector, domestic demand for steel is expected to plunge by more than 20 percent in the FY 2021, which would be the sharpest decline on record. The estimates for March and April 2020 reveal a sharp year on year contraction in steel demand of 22 percent and 91 percent, respectively. As a consequence, the rating agency's outlook for the domestic steel sector has been updated to negative from stable.
Despite higher borrowing levels of state governments which have been permitted subject to conditions, infrastructure spending by the centre and states could be partially deferred to the next fiscal year due to the current decline in tax collections, limiting the possibility of a sharp rebound in steel demand after the lockdown, Roy said.
With around 51 percent of the urban population living in red zones, the demand for steel from the construction and real-estate sectors could take some time to return to pre-COVID-19 levels, limiting the possibility of a sharp rebound in domestic steel demand, according to ICRA’s analysis.
In addition, the shortage of demand, the movement of labor, the timely availability of raw materials, and the scarcity of liquidity and working capital remain some of the primary problems confronting steel end-users.
New steel capability of million tonnes is projected to be installed in the coming months and the domestic industry's capacity utilization levels are expected to plummet to less than 65 percent in the FY 2021.
Steelmakers have concentrated on export deliveries as destocking of inventories and an improvement in the liquidity of the balance sheet seems to have taken a higher priority over profitability.
“Industry’s export consignments made during the lockdown have been to China, the Middle East, Vietnam, and other South-East Asia countries. Despite exports being less remunerative than domestic sales due to the duty protections available within India, steelmakers have continued to focus towards the export markets in May as well,” said Roy.
ICRA observes that the bulk of the allocations of the recently announced Rs. 20-Lakh-Crore Covid-19 package has been directed towards expenditure by the social sector and has allowed credit flows to the stressed/ vulnerable sectors of the economy.
“Unlike an investment-led stimulus, the measures announced so far by the GoI may not lead to an immediate rebound in domestic steel demand in the prevailing weak demand environment,” the report said.