Demand for steel in India, a key barometer of the overall economy, is likely to fall by over 20 per cent, its sharpest decline ever in a year in fiscal 2021, ratings agency ICRA has said. It has also revised the outlook on the industry from stable to negative.
Steel demand saw a contraction of 22 per cent in March and a steep 91 per cent in April as per official government figures. The extension of the lockdown for the fourth time till the end of May will only extend the pain.
"Quickly rebooting the steel industry from hibernation is going to be a tough task. The first half of FY2021 is expected to be especially 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," says Jayanta Roy, Senior Vice-President & Group Head, Corporate Sector Ratings, ICRA. "Moreover, despite higher borrowing levels of state governments that have been allowed subject to conditions, infrastructure spending by the centre and states could be partly deferred to the next fiscal, due to dwindling tax collections currently, limiting the possibility of a sharp bounce back in steel demand post the lockdown."
As per analysis by the agency, the slowdown in the sector is exacerbated by traditional demand hotspots falling in the COVID-19 hotspots that are in the red zone where no business activity is allowed. The curbs in these areas are also likely to be extended beyond May 31 as well.
"Key steel consuming states of Maharashtra, Gujarat, Delhi, Tamil Nadu, Andhra Pradesh, Telangana, Rajasthan and Punjab have a sizeable portion of their population living in districts marked as red zones. With around 51 per cent 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, limiting the possibility of a steep rebound in domestic steel demand," it said.
Further, migration of labour, timely availability of raw materials, and liquidity or working capital availability related problems have also become more acute.
"Unlike an investment-led stimulus, the measures announced so far by the government may not lead to an immediate rebound in domestic steel demand in the prevailing weak demand environment. In the current fiscal, steelmakers would not only have to grapple with weakening spreads, but also lower deliveries, as companies jostle for space to protect volumes amid shrinking domestic demand," it said.
As a result, operating profitability of the players in the industry is likely to be adversely impacted. Fresh steel capacity of 10 million tonne (mt) going on stream in the next few months could also see capacity utilisation rate of the industry plummet to less than 65 percent in FY2021.
"Steelmakers have focused on export deliveries as domestic demand dried up during the lockdown. Our channel checks suggest that most of the 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," Roy said. "De-stocking inventory and shoring up the balance sheet liquidity seems to have assumed a higher priority over profitability to tide over these challenging times for steelmakers."Coronavirus: 120 countries unite to corner China; Xi Jinping agrees to probe, WHO's actions under scanner