Weak demand, oversupply to hurt steel makers post-lockdown: Ind-Ra

May 2,2020

According to a survey by India Ratings (Ind-Ra), domestic steelmakers are likely to face depressed demand and over-supply that would result in suppressed steel prices post-lockdown. In turn, they are still likely to encounter challenges with labor availability and logistical movement, the study published on Thursday said.

"Muted demand and oversupply is likely to create a loop leading to suppressed prices until either there is a substantial uplift in demand or a substantial volume goes out of the market," it said.

Ind-Ra said the nationwide lockdown has aggravated the challenges for the steel sector.

The report said, "With lockdown relaxation in several districts across India beginning May 4, 2020, Indian steel players will be looking to slowly expand capacity utilization. In the near term, the key challenges are the availability of manpower and ensuring a finished inventory to normal levels. Although steel and its raw materials have been identified as critical commodities, logistical constraints can remain due to the fleet's non-availability and longer travel time."

The agency said it had already updated the forecast for the February 2020-21 financial year to negative from stable for the sector. In FY21, domestic steel demand is projected to decline by about 12-15 percent year-on-year with end-use industries closed and demand growth anticipated to be minimal in the near term.

Demand from infrastructure, construction, and real estate sectors are likely to be subdued in the first half of FY21 with the lockdown in April-June FY21 and the monsoon season over July-September FY21, it said.

In addition, demand from the automotive, white goods, and capital goods sectors are expected to decline with customers avoiding discretionary spending in the near term. As such, government infrastructure spending is expected to be the primary catalyst for a gradual recovery across July-September FY21.

The agency further indicated that it expects an inventory build-up mainly of intermediate / semi-steel goods with downstream facilities closed during the lockdown of most players. Big producers often maintained their blast furnaces running at 35-50 percent lower efficiency owing to the high expense of restarting the furnace if it was to be shut down. Throughout the lockdown, however, small and mid-scale producers with induction / electric arc furnaces stayed shut down entirely.

"The built-up inventory shall put pressure on steel prices post lockdown and the agency expects a correction of INR 3,000 per million tonnes on average realizations over FY21 on a year on year basis. As of end-March 2020, hot-rolled coil prices (Delhi 2.5-8mm, IS2062) were 3 percent lower while rebar prices were 9 percent lower than those at end-January 2020 when there were limited concerns over the spread of COVID-19 in India," it said.

Ind-Ra said the sector would require help from the government to keep a close watch on imports from countries with which India has concluded free trade agreements (FTA).

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