Indian Steel Demand not Likely to Resume before Third Quarter

The Novel Coronavirus or Covid-19 rampaging across the globe is taking a huge toll on domestic steel demand, which has been reduced to almost nil at present. But, even more disturbing is the fact that sources in the steel industry think, even once the lockdown is lifted, domestic demand is probably going to come back only by the onset of the third quarter (October-December) of the upcoming financial year of 2020-21. It means the industry may have to brace for a six-month disruption in demand from the present juncture.

Industry insiders took to practical reasoning to explain why they feel demand is not likely to rebound before six months, and that too, at a very nominal pace.

Construction & Auto

Sixty percent and above demand for steel is fuelled by construction. But, such activities have come to a grinding halt at present. All labourers have been asked to return home because of the country-wide lockdown.

Even if the Covid-19 crisis resolves by April-end, most industry players do not think labour hands will return immediately to construction work. By June, the monsoons will start, a period during which the labourers prefer to stay in their villages to undertake harvesting and sowing of crops. "The monsoons are a lean period in terms of getting hold of labour. Therefore, no construction will resume before August-end or beginning of September. So we can assume that over 60% of the demand will remain muted till this period," a source in the Indian Steel Association (ISA) reasoned.

The second big consumer is the auto sector, but it is a known fact that auto sales spiral mainly during the festive season. Industry players are expecting sales to remain overall subdued in the run-up to the festive season because car prices have already gone up on account of BS VI factors. "We do not expect auto demand to resume before September," the ISA source opined.

Both the construction and auto sectors together account for 70-75% of steel consumption. If this huge percentage of demand remains muted for the time being then, obviously, the steel industry could be bracing for somewhat uneasy times ahead.

"We may see demand picking up only from the beginning of the third quarter because of construction and auto demand dropping off at present," a well-placed industry source corroborated, adding: "Now, even if the mills produce - and steel falls under the essential commodities category - there are no customers to whom they can supply, because, in a lockdown, unless it is a continuous process, every user industry segment needs to close down. Auto makers have locked down, construction activity has come to a grinding halt since labourers have gone home. Even if there are existing orders these are getting cancelled. Because, if you send your staff back home, who will be there to unload supplies - one needs labour hands to unload?"

Shutdown mode

An industry analyst said: "I will not be surprised if demand goes into negative territory. One significant fact that has to be taken into account is that the entire cement industry will remain in shut-down mode. And in a period of 15 days after the crisis blows over, it is impossible to expect that demand will pick up."

"Therefore, it does not make sense for most mills to continue with production since domestic demand has gone down to almost nil at present," the analyst said.

The analyst elaborated that the start-up cost for the cement industry is not as high as in steel and so most mills in the latter category would opt for "production curtailment". If a steel mill operates both a large blast furnace (BF) and a smaller one, with demand remaining almost nil, it could well consider shutting down the smaller one. "A non-integrated player who runs one unit might as well shut down because he is unsure about the demand scenario. And there will be inventory pile-up as all the big producers who are continuing production won't have a stable domestic market and exports too will dry up as all countries have announced lockdowns. So everyone is in a tight spot as they are unsure as to when demand will pick up. Thus, it would be prudent for the steelmakers to idle some of the smaller facilities as the situation will likely remain tepid in the first quarter," Ritabrata Ghosh, Assistant Vice-President, ICRA Limited, told SteelMint.

Several integrated players have already announced idling of some of their production capacities/cut in output. These include JSW Steel, RINL, ArcelorMittal Nippon Steel India and many others.

"But, many of the secondary players are likely to go for full shutdown as their start up costs are not as high as that of integrated players," Ghosh added.

~By Madhumita Mookerji