India: Covid-19 is about to destroy the profitability of the metals sector

Covid-19 casts a long shadow over the long-awaited recovery in fiscal 2021, which is why the Indian steel sector faces yet another period of uncertainty with falling demand and falling prices undermining its profitability.

The steel sector has been performing fairly well over the past few months, with HRC prices also jumping 10-13% in the fourth quarter of FY20.

But as the Crisil report points out, the sector will enter another extended period of lower prices and even weaker demand, with weak global demand, supply disruptions, plant shutdowns, reduced discretionary spending and a delayed capex cycle, leading to the perfect storm that may affect construction work. and the production of automobiles, and hence the demand for steel.

The rating agency presented two scenarios in its sector report: a baseline scenario and a pessimistic one regarding the period of spread and containment of the pandemic.

In the baseline scenario, Crisil predicts that steel demand in India will decline by 14-17% in this financial sense. However, in an environment of increased vulnerability, the reduction in demand could be higher between 22-25 percent.

The baseline scenario ensured that the lockdown continued in the first quarter of fiscal year 21, and construction and manufacturing work began at the end of the quarter, while in the pessimistic scenario, the lockdown continued even into the second quarter of fiscal year 21, and construction and production work began only in the second quarter.

Chrisil said that on a quarterly basis, steel demand will erode in the first quarter of this fiscal year given the pan-India shutdown, which will hurt construction. All car factories have also been closed, further dampening demand prospects.

There is also no respite for the capital goods industry in the current scenario. Demand will only grow from the second half of this fiscal year, the message says.

No increase in capacity is expected during the year as steel players have postponed capex. Also, full recovery will take longer.