Coronavirus impact: Steel firms mull output cut amid subdued demand

The spread of coronavirus, coupled with rising threats of cheap imports from China, Japan and South Korea, has kept the lid on domestic steel prices and forced producers to consider pruning production in the short term, amid subdued demand.

In a recent report, Kotak Securities has projected a price cut of Rs 1,000-1,500 per tonne in the domestic market in the first quarter of FY21. Indian steelmakers, who have hiked prices by 15% for hot-rolled coils (HRC) since November last year to Rs 37,000 per tonne now, will be forced to absorb costs until demand recovers.

“Steel consumption grew by just 3.8% till February. Nobody knows what the future holds; but if the coronavirus spreads further across the country impacting manufacturing, steel industry will be highly impacted. There will be huge pressure on prices; we may have to go for production cut,” said VR Sharma, managing director of Jindal Steel & Power (JSPL).

Paul Bartholomew, senior managing editor at S&P Global Platts, told a television channel on Tuesday that elevated Chinese steel inventory would weigh on global prices.

Already, Chinese steel prices have corrected by 6-10% in the past two months as demand dropped. Its inventory has swelled to a record level of 25 million tonne, up 34% year-on-year. Export prices of Japan have also corrected by 6% to $475/tonne.

Although domestic steel prices are still trading at discounts of 7% and 3% to the landed costs of the metal from China and Japan, respectively, the situation may change swiftly, given the rising inventory in China. Rising number of confirmed cases of coronavirus in India and persisting macroeconomic concerns may dent domestic steel consumption, according to an ICRA report.

“Higher exports from China would keep regional steel prices under pressure; however, we don’t see China flooding regional markets given limited port infrastructure and ongoing early maintenance shutdowns. Export prices from FTA countries (Japan and Korea) have corrected by 6% to $475/tonne and should create downward pressure in domestic markets,” the Kotak report said.

To beat costs, domestic steelmakers started raising the price from November onwards, anticipating a spike in government spending towards infrastructure. Ebitda margins of steelmakers dropped around 35% year-on-year in the first three quarters of this fiscal.

India Ratings and Research (Ind-Ra) also recently revised its outlook on the steel sector to negative for 2020-21 from stable. “The slowing economic activity as reflected in Ind-Ra’s GDP estimates of 5% and 5.5% for FY20 and FY21, respectively, would continue to affect demand growth in steel sector and any significant pick-up is unlikely. In case the steel demand does not strengthen up in the second half of FY’21, new capacity additions along with stressed asset ramp-up could put further pressure on the prices and plant capacity utilisation rates,” Ind-Ra said.
Source: Financial Express