Rating Agency Crisil in its report “Melting steel – The COVID-19 pandemic is set to wreck profitability” said that the Indian economy needs to steel itself with COVID-19 casting a long shadow over a much-anticipated mild recovery in fiscal 2021. The economy is grappling with lockdown, factory shutdowns, reduced discretionary spending and delayed capex cycle along with external factors such as weak global demand, supply disruptions, and worldwide financial shocks. It said, “We expect this perfect storm to affect construction activities and automobile production, and thereby, steel demand”.
About how low the demand will be, it said” Given the uncertainty in the current environment, we have based our analysis on two possible scenarios baseline and pessimistic with regard to the spread and containment period of the pandemic. In our baseline scenario, steel demand in India would contract 14-17% this fiscal. Extended vulnerability, on the other hand, will increase the demand contraction to 22-25%.”
It also mentioned that on a quarterly basis, steel demand would be a washout in the first quarter of this fiscal, given the pan-India lockdown that would hurt construction. All automobile plants have also been shut, which will further weaken demand prospects. There is also no respite from the capital goods industry in the current scenario. Demand will pick up only from the second half of this fiscal.
Some of the reasons highlighted for the delay in the full-fledged recovery are:
Weak demand from infrastructure on account of lower capex by government. The lower infrastructure capex in on account of diversion of funds towards health and public welfare. Building and construction would contract this fiscal on account of weak demand from real estate and private individual home builders Supply constraints for the automobile sector as well as muted demand with estimated gradual recovery only in the second half would lead to sluggish wholesale offtake. Weakening capacity utilization amid the virus outbreak would also weigh on industry capex, thereby dampening demand from the capital goods segment.
It also said “We expect weak steel demand in the first quarter, led by the COVID-related lockdown. While demand would contract in the second quarter as well, pent-up demand release, especially in construction and infrastructure, would aid growth in the second half. No capacity additions are expected during the year since steel players have postponed capex plans.”
The report further said, ”Contracting demand growth will push the sector’s utilization level down further to 67-70% (to be lower for electric arc furnace/induction furnace players), adding to the pain from the weakening to 76% seen in fiscal 2020. Prior to the outbreak, 10 million tonnes of steel capacity was expected to come on board in the second half of this fiscal. However, the current demand shock is expected to dent the industry’s capacity addition plans and stall or delay projects in the medium term. At present, construction/modification activities at some of these plants are halted so we expect a delay in capital expenditure for these plants”.
