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Kallanish Kallanish

Knowledge matters Knowledge matters

September, 30th 2020

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MAY 20

Delayed investment supresses Indian demand, liquidity problematic: ICRA


Capital investments by corporates and government could be delayed for some time, given dwindling corporate earnings and tax collections on account of the Covid-19 pandemic, says credit analyst ICRA. This will contribute to a -20% on-year decline in Indian steel demand in the fiscal year through March 2021 (FY21), the sharpest fall on record.

March and April data point to a -22% and -91% on-year decline respectively in Indian steel demand.

Coupled with lower steel prices and therefore spreads, sales in India’s domestic steel market have almost come to a complete halt, impacting steelmakers’ profitability. Liquidity management has taken centre stage.

ICRA has thus revised its outlook on the domestic steel industry to Negative from Stable.

Steel demand hotspots overlap with Covid-19 hotspots. “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 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,” the credit rating agency observes in a report seen by Kallanish.

Given the spike in new Covid-19 cases in India, the government extended the nationwide lockdown till end-May, which suggests the negative impact on steel demand will be more adverse than was foreseen in early April. The first half of FY21 will be particularly challenging for steelmakers, with buyers in wait-and-see mode given liquidity issues and falling demand.

Recent announcements on liquidity injection measures by the government and Reserve Bank of India (RBI) could partly help alleviate the interim stress for steelmakers and end-users, ICRA comments. However, a quick demand rebound post lockdown is unlikely.

Steel deliveries should gradually return to pre-Covid-19 levels from the December quarter if the current lockdowns are not extended further.

Despite exports being less profitable compared to domestic sales which are supported by customs and anti-dumping duties, steelmakers have focused on export sales in April and May. “Destocking inventory and shoring up balance sheet liquidity assumes a higher priority over profitability to tide over these challenging times for steelmakers," ICRA says.

Finally, with 10 million tonnes/year of fresh steel capacity expected to be commissioned in the coming months, Indian steel capacity utilisation is expected to plummet to below 65% in FY21.