Covid-19 set to wreck profitability of steel sector

The steel sector had a fairly better run for past few months with benchmark hoy rolled coils (HRC)  prices also jumping between 10-13 per cent as late as the fourth quarter of FY20.

But as a Crisil report now points, the sector will enter another long period of lower prices and even lower demand with weak global demand, supply disruptions, factory shutdowns, reduced discretionary spending, and delayed capex cycle generating a perfect storm that would affect construction activities and automobile production, and thereby, steel demand.

The rating agency in its report on sector has presented two scenarios: baseline and pessimistic with regard to the spread and containment period of the pandemic.

In its baseline scenario, Crisil has projected that steel demand in India would contract 14-17 per cent this fiscal. However, with extended vulnerability, the demand contraction could be higher between 22-25 per cent.

The baseline scenario assured that lockdown continues in Q1 of FY21 and construction and production activities start at the end of the quarter while in pessimistic scenario lockdown is continuing even in Q2 of FY21 and construction and production activities begin only in Q2.

Crisil has said 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 for the capital goods industry in the current scenario. Demand will pick up only from the second half of this fiscal, it said.

No capacity additions are expected during the year since steel players have postponed capex. Also a full fledged recovery would take longer.