The Indian steel sector has been facing headwinds since the beginning of 2019 due to general elections, intensified trade tensions, slump in auto sales and the slowdown in the domestic economy.
The Covid-19 pandemic only added to the sector’s woes.
However, tailwinds in the form of recovery in domestic as well as global demand (especially China) and rise in iron ore prices have revived the metal.
Going ahead, steel users should brace for prices at existing levels, at least in the near-term.
Covid impact
By mid-March 2020, when the impact of the Covid-19 outbreak was felt in India, the demand for most steel companies had almost dried up
The consumption of steel in the first half of 2020 fell by about 30 per cent (over the same period in 2019) to 36.15 million tonnes (mt), as per the World Steel Association (WSA).
However, as shutting down the steel plants could have led to technical problems and higher cost, most integrated steel players did not do so during the lockdown and continued to operate at minimum capacity.
Continued production and non-existent demand led to a fall in steel prices by about 12 per cent by June to ₹35,750 per tonne of HRC (hot-rolled coil) steel from the beginning of 2020.
Recovery path
As per Moody’s, production is ramping up in automotive and industrial sectors after the gradual lifting of coronavirus-related shutdowns. Also, PMIs (Purchasing Managers’ Index) in major steel-consuming regions (US, Eurozone, China) are off lows, with a reading of above 50. In PMI parlance, a print above 50 means expansion, while a score below that denotes contraction.
A report from Motilal Oswal suggested that the recovery in steel demand in China — the top producer and consumer of the metal — has been buoyant. According to steel trade data released by China, the country’s net steel exports declined to 10-year lows in September 2020, while the imports have been at record highs. In India, too, PMI increased from 52.0 in August to 56.8 in September, the highest since January 2012.
Earlier in April, the index had slipped into contraction mode, after remaining in the growth territory for 32 consecutive months.
Reflecting the turn, from July, domestic HRC prices have risen by about ₹7,000 a tonne to ₹42,750 (as per data from SteelMint) in line with the global steel prices. Global prices have been going northwards on the back of renewed demand for the metal — especially from China — and rise in prices of iron ore, a key raw material for steel.
The current domestic prices are higher than the average HRC prices witnessed in 2019 and also over the landed cost (import cost) of steel from Japan by 6- 7 per cent, as per credit rating agency ICRA.
Looking ahead
The health of the steel industry, which is directly proportional to global economic activity, is expected to be tepid in 2020 but recover in 2021.
Even in 2020, the ongoing second half of the year is likely to be better than the first half.
As mentioned earlier, steel consumption in 2020 till June dropped by about 30 per cent compared with the corresponding period last year. But as per the WSA, steel consumption in India in the whole year 2020 would be lower by 20 per cent year-on-year. This indicates that the consumption in the second half is expected to be better than in the first half of the current year.
The Centre’s initiatives on capital expenditure and focus on Atmanirbhar Bhara’ are expected to boost steel demand. The WSA, too, has factored this in, and has forecast steel consumption to grow by srobust 22.7 per cent y-o-y (partly due to low-base) in 2021.
Rating agency Moody’s has revised the outlook for the global steel industry for the next 12-18 months to ‘stable’ from ‘negative’.
Prices range-bound
Going ahead, the downside to steel prices seem limited with good demand from China and elevated iron-ore prices, both of which will act as a support to the benchmark HRC steel prices. Having said that, any resurgence of the virus that would impact the economic activity could severely impact prices.
However, given the recent rise in steel prices, the upside also seems to be limited, especially when import cost from Japan is lower than domestic HRC prices. This would threaten the demand for domestic steel and, hence, serve as a check on domestic prices.
Thus, while steel prices are expected to be range-bound for sometime, any further fall in coking-coal prices, especially due to the dip in imports by major importing regions such as Japan, the European Union, South Korea and India, if sustained, will aid the profitability of steel-makers.
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