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ICRA May FERROUS METAL UPDATE

Steel News - Published on Wed, 20 May 2020

Image Source: Steel India Coronavirus COVID-19 Lockdown
Rating Agency Icra in May FERROUS METAL UPDATE said that quickly rebooting the Indian steel industry from hibernation a challenging task as demand expected to wane in FY2021; sector outlook revised to Negative. India’s domestic steel demand to remain subdued until the Covid-19 pandemic is brought under control; fresh reported cases have spiked in April and May; given the dwindling corporate earnings and falling tax collections, capital investments by corporates or the Government could take a backseat for some time, which does not augur well for the steel industry; early indications of an unprecedented demand slowdown are visible in the March and April 2020 official data, which points to a steep year on year contraction in steel demand of 22% and 91% respectively.

Steel demand “hotspots” are overlapping with Covid-19 hotspots; this would hurt the steel demand recovery over the near term; key steel consuming states of Maharashtra, Gujarat, Delhi, Tamil Nadu, Andhra Pradesh, Telangana, Rajasthan and Punjab have a sizeable portion of their pop ulation living in the red zones; with around 51% of the urban population living in red zones, steel demand from the construction and real-estate sectors could take some time to return to the pre-Covid-19 levels.

Given the spike in new Covid-19 cases, the Central Government has extended the lockdown by over a month and a half from April 14, 2020 to May 31, 2020. Consequently, its negative impact on steel demand would be more adverse than what was foreseen in early April 2020. The first half of FY2021 is expected to be especially challenging for steelmakers, as many buyers could prefer to sit at the sidelines, given the uncertain demand environment and liquidity pangs of steel consumers, amidst dwindling sales and fixed cost obligations.

Slackness in demand, migration of labour, timely availability of raw material, and liquidity or working capital availability remain some of the key challenges grappling end-consumers of steel; recent announcements on liquidity injection measures by the Government of India and the Reserve Bank of India could partly help alleviate the interim stress for both steelmakers and end-users of steel tide over the ongoing phase of subdued economic activity.

Railway’s capex programme likely to temporarily face a slow-down amidst falling revenues; Central and State Governments may not be able to channelise sizeable resources towards infrastructure spends in FY2021 amidst dwindling tax collections; infrastructure spending by the Centre and States could be partly deferred to the next fiscal, limiting the possibility of a sharp bounce back in steel demand post the lockdown.

Out of the Rs. 20 lakh crore Covid-19 package which has been announced, bulk of the allocations have been directed towards social sector spending and enabling credit flow to the stressed/ vulnerable sectors of the economy. Unlike an investment led stimulus, the measures announced thus far by the GoI may not lead to an immediate rebound in domestic steel demand in the prevailing weak demand environment. Fresh allocation of Rs. 70,000 crore to the credit linked subsidy scheme CLSS under the Pradhan Mantri Awas Yojana PMAY remain a few key positives which has the potential to stimulate steel demand in the near term.

Domestic steel demand estimated to decline by upwards of 20% in FY2021, which will be the sharpest fall on record; bulk of the lost demand expected in the first half of the fiscal; industry despatches likely to gradually return to pre-Covid-19 levels from Q3 FY2021 if the current lockdowns announced by the GoI and the State Governments are not extended further; steelmakers would have to not only grapple with weakening spreads, but also lower deliveries; this would adversely impact the operating profitability and debt protection metrics of steelmakers in FY2021, leading ICRA to revise the outlook on the steel industry from Stable to Negative.

Steelmakers focus on the export deliveries as domestic demand dries up during the lockdown; despite export prices being less remunerative, shoring up balance sheet liquidity assumes a higher priority over profitability to tide over these challenging times.

In the current fiscal, steelmakers could jostle for space to protect volumes amidst shrinking domestic demand; as fresh steel capacity of 10 million tonne) is expected to be commissioned in the coming few months, the capacity utilisation rate of the domestic industry is expected to plummet to less than 65% in FY2021

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Posted By : Yogender Pancholi on Wed, 20 May 2020
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