Covid-19 impact: Metal firms stare at uncertain future

Most steel companies have displayed a steely resolve and continue to maintain production braving the novel Coronavirus which had singed businesses across the globe.

While steel production and allied activities such as mining are covered under the Essential Commodities Act, it has to be seen how long steel companies can continue producing with the demand being completely wiped out.

Steel companies have booked orders till March-end and will start facing the challenge to sell products from April as most of the auto majors and white goods producers have downed shutters.

Stopping production and shutting down the blast furnace will be a costly affair for the overleveraged steel companies. Companies producing non-ferrous metals such as aluminium, copper, zinc, and lead with continuous processes such as smelters and potlines have urged the government to cover them under the Essential Services Maintenance Act like the steel industry.

Most large steel companies such as JSW Steel, Tata Steel, ArcelorMittal Nippon Steel, and SAIL are maintaining their production while many non-ferrous companies such as Hindustan Zinc, Hindalco Industries, and Vedanta Aluminium have either cut or discontinued production completely.

The sudden fall in demand will also put brakes on a steady rise in steel prices. Despite the slowing demand, steel companies were increasing prices to bridge the gap with the high global selling price.

Arun Singh, Chief Economist, Dun and Bradstreet India, said there are chances of supply-side disruptions as severely affected Covid-19 countries such as China, Japan, the US, and Malaysia account for over half of India’s metal and metal products imports.

Steel is a major metal accounting for 63 per cent India’s imports and 68 per cent of exports. A decline in the steel output in China, which is India’s largest supplier of finished steel and steel products, has roiled the domestic market. Major domestic companies are now looking for suppliers in alternative markets such as Turkey and Brazil.

The impact of a slowdown in global demand on the domestic sector will be limited as steel producers export only 8 per cent of their total production. But since the metal industry has strong forward linkages to many important sectors such as automotive, construction, infrastructure and manufacturing, a slowdown in business activity in these sectors will inevitably drive down the derived demand for metals, he said.

Operating at a record low capacity utilisation level, metal companies are hoping that the complete lockdown will be lifted mid-April and things will slowly fall in place even while the global recovery is expected to take a longer period.

“We are not constrained to meet maintenance and salary expenses till April-end since sales in January and February were very good on higher price realisation and expectations are that domestically economy should start picking up from May,” said a senior steel company official.

However, he added if the lockdown prolongs things may become challenging as measures to shut down blast furnace have to be taken.

The prospects of aluminium producing companies appear to be more challenging as they export more than half of their production to developed countries. Domestic aluminium demand fell by 0.4 per cent to 21.7 million tonnes in first 10 months of this fiscal.

India’s primary aluminium production declined by 1.6 per cent to 30.45 lakh tonne between April and January mainly due to weak demand. Exports during the period fell by 5.8 per cent to 15.51 lakh tonnes while imports plunged 18.6 per cent to 22.71 lakh tonnes.

Production by Nalco, Balco and Vedanta fell during the period. Hindalco was the only company to report a marginal 1.3 per cent in production.

Aluminium prices are likely to remain under pressure due to uncertainty related to extensions of lockdowns due to the Coronavirus pandemic. A slowdown in manufacturing activities due to lockdowns across the country will hit demand for the metal, said a Crisil Rating report.

Vishal Chandak, Research Analyst, Emkay Research, said while steel companies are receiving key raw materials such as iron ore, coking coal and limestone through rakes, they are still dependent on road movement for a variety of other minor raw materials such as ferro alloys.

Hence, all major steel plants have to reduce operations significantly over the next 7-10 days and keep only critical operations in a standby mode to ramp up production with minimum cost as soon as the Government removes the nation-wide lockdown, he said.

Steel companies generally store about one or two month of iron ore requirement close to the factory but may face difficulty in moving them through road as most state governments have restricted lorry movements.

On the contrary, steel production in China has already started and it is offering special incentives on exports even as other countries are busy fighting the pandemic with economic lockdown.

China had increased VAT (value added tax) rebate on exports from 10 per cent to 13 per cent to boost steel production and dump it on other countries as their economy comes out of the virus attack.

Coming out of Covid, the Indian steel companies not only have to cope with lower infrastructure spending by the cash-strapped government but also take on market under-cutting by China in the export market.

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