Steel industry faces inventory build, liquidity issues

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New Delhi, March 30 | The performance of domestic steel makers is likely to be adversely impacted in Q1 FY2021 as a result of Covid-19 pandemic and the 21-day nationwide lockdown.

As per an ICRA note, domestic firms may have to face challenges such as weak domestic demand, which is likely to lead to inventory pile up exerting pressure on steel prices.

Though reported COVID-19 cases in China have slowed down in recent weeks, globally, there is a spike in reported cases in March 2020. This will keep the seaborne demand muted until the health situation improves.

The seaborne hot rolled coil (HRC) export price offers have plummeted in March 2020 for want of buyers. However, most large domestic steelmakers have continued production during lockdown, given the high shutdown costs.

According to Jayanta Roy, Senior Vice President and Group Head, ICRA, “The Covid-19 and slowing Chinese demand will affect global steel demand-supply balance in the near term. Healthy Chinese production growth had kept global steel production growth at 3.4 per cent in CY2019 but demand destruction in other geographies is expected to halt the growth globally. China’s steel exports are likely to remain low due to outbreak spreading in other geographies despite a recent increase in export rebates.”

“In the domestic scenario, the outbreak and nationwide 21-day lockdown will keep both production and consumption under check in Q1 FY2021. The key demand drivers for domestic steel demand – construction and the infrastructure sectors, besides the automobile and capital goods sectors, continue to witness muted or negative growth.”

As far as exports are concerned, ICRA note said the rapid spread of the outbreak to countries other than China have disrupted the seaborne steel trade, and the same is likely to fall further amidst the looming uncertainty surrounding global growth. During Q2 and Q3, a spurt in exports turned India into a net steel exporter. As for imports, increased scrutiny of shipments and weakenedrupees are expected to keep them low.

The rally witnessed in domestic steel prices since November 2019 is based on supportive international prices, but this is likely to be halted due to the outbreak. Domestic HRC prices stood at Rs 38,000 per tonne in March 2020, and given the choking of demand amidst the lockdown, a correction looks highly likely in the next quarter.

On the demand outlook, ICRA said it is not expecting a rebound in steel consumption growth in FY2021. As against a growth rate of 3.8 per cent in FY2020, consumption growth is likely to settle at around 2-3 per cent in FY2021, given that Q1 could be a very weak quarter.

With the export market also remaining tepid, and incremental capacity addition of 10 mtpa, industry capacity utilisation rates are seen to be lower from 81 per cent in FY2020 to about 79 per cent in FY2021 assuming a recovery in demand conditions in the second half.

“Margin improvement is unlikely in FY2021; consequently, Indian steel industry’s debt protection metrics are likely to remain subdued in FY2021. The industry’s Total Debt, which improved to 2.9 times during the upcycle in FY2019, is expected to deteriorate to around 4 times in FY2020 and FY2021. The fall in the industry’s earnings can also be gauged from the credit ratio of our rated portfolio, which stood at 0.8 times in 11M FY2020,” said Roy.

Source: IANS

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