Steel demand likely to slip by 14-17% in FY21, says Crisil

Steel demand in India is expected to decline 14-17 per cent this fiscal, as the construction activities likely to get further impacted due to the second phase of lockdown, rating agency Crisil said.According to the agency, the lockdown wfill not just affect construction activities, but also automobile production, which will thereby impact steel demand.

Given the uncertainty in the current environment, Crisil expects the steel demand to contract by 14-17 per cent for the fiscal considering that the nationwide lockdown is likely to continue through Q1 with some after effects in Q2.

"The demand is expected to contract by 14-17 per cent assuming that the construction and production activities will begin at the end of the first quarter," the agency said.

However, maintaining a pessimistic approach, assuming that partial lockdown continues through Q2 and construction activities and automobile production begin from Q2 FY21, demand contraction will increase to 22-25 per cent.

"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," the agency said.

Also, since 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, it noted.

Crisil further stated that a full-fledged recovery will take longer because of weak demand from infrastructure on account of lower capex by government, as funds are diversion 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. Also, 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," the agency said.

However, it may be noted that on April 15 the government issued guidelines allowing construction activities in non-COVID-19 hotspots and has identified 170 districts as hotspots, while 207 districts as non-hotspots.

Crisil further maintained that weakening capacity utilisation amid the virus outbreak would also weigh on industry capex, thereby dampening demand from the capital goods segment.

"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," Crisil said.

According to the agency, contracting demand growth will push the sector's utilisation level down further to 67-70 per cent (to be lower for electric arc furnace/induction furnace players), adding to the pain from the weakening to 76 per cent seen in fiscal 2020.

Prior to the outbreak, 10 million tonne of steel capacity was expected to come on board in the second half of this fiscal.

On steel prices, Crisil noted that global prices will continue to weaken amid slack demand.

"While China's activity picked up in March from its Covid-induced slump in February, steel demand in the first quarter of calendar year 2020 is estimated to have declined 30-40 per cent on-year. This has led to high inventory levels of 100 million tonne. While activities have begun to resume in China, we believe the demand would remain muted in the first half.

"Property sales are also expected to drop significantly in 2020, thus crimping steel demand in China by 10-15 per cent for the year," it said.

Moreover, the export market for China steel is almost non-existent as other economies grapple with Covid, leading to a four per cent year-on-year fall in prices to USD 486 per tonne for the first quarter of the year.

"China steel prices are expected to correct further owing to weak demand, with the resultant fall in prices taking steel to USD 440-470 per tonne for 2020. This comes on 13 per cent decline in steel prices in China in 2019," it added.

Crisil also expects EBITDA margin for the sector to contract by 100-150 basis points this fiscal.

"Lower coking coal prices should limit margin erosion since prices would likely ease to USD 140-150 per tonne in 2020 from USD 177 per tonne in 2019. We expect iron ore prices to remain range-bound with an upward bias since tepid demand will offset the price rise owing to high bid premiums in Odisha auctions," it said.

SEE ALSO: Coronavirus News and Updates
India’s looming jobs crisis is starting to unravel within the first 21 days of coronavirus lockdown