Ferrous metals headed for subdued start in FY21 due to dip in auto demand

After recovering in Q4 of FY20, the ferrous metals segment is headed for a subdued start in FY21.

Analysts believe that strict quarantine measures to enforce lockdown will lead to demand erosion even though the supply side is facing relatively lower disruptions.

“Demand for finished steel products has slowed down even before the onset of coronavirus pandemic due to flagging auto demand and shrinking government capex spends. In this stage of unforeseen crisis, steel companies with long products portfolio and limited overseas exposure will perform better,” said a metals analyst.

There are apprehensions that if the nationwide lockdown to contain the spread of the virulent pandemic is extended till June end or Q1, steel demand could wipe out by 14-17 per cent. Moreover, should the lockdown be stretched till September this year, steel demand is seen contracting by 22-25 per cent.

“Any further extension in lockdown will not augur well either for the steel industry or the nation’s economy. The domestic steel industry is already facing international headwinds. At 24 million tonnes, steel inventory in China is higher 50 per cent year-on-year (y-o-y) and is still at elevated levels. Inventories in China have peaked out but are still higher than previous years,” said a senior executive with a steel company.

Pricing pressures on steel is also weighing on raw material costs. Coking coal prices have contracted 15 per cent month-on-month (m-o-m) in April to $135 per tonne. Iron ore prices, too, have tumbled nine per cent m-o-m to $81 a tonne in April.

Despite easing international prices, domestic iron ore prices continue to remain at elevated levels primarily due to supply disruptions in Odisha. Merchant mines that were auctioned have not restarted operations due to pending paperwork from the state authorities. Most state departments barring those dealing with critical services are in limbo in the lockdown. Odisha had put 21 iron ore, manganese and chromite blocks to online auctions. Their lease validity had lapsed by March 31, 2020. To facilitate seamless transfer in ownership and ensure continuity in mining operations, the Centre by the dint of an Ordinance, had extended the validity of all statutory approvals for these mines by two years.  Yet, the grant of vesting orders and other formalities from the state government are awaited to keep the mines running again.

It may be noted that steel export prices after peaking in January 2020, have seen correction in Japan and China, falling by 18-20 per cent. In February, India’s steel exports logged sharp contraction of 31 per cent y-o-y.

In the domestic market, primary steel producers had hiked HRC (hot rolled coils) prices by 15 per cent or Rs 5000 per tonne and long products prices by 16 per cent or Rs 6000 a tonne between November 2019 and March 2020.

“However, given the mellowing international prices and subdued domestic demand, steel prices are expected to witness correction of Rs 3000-5000 per tonne in the near future”, the analyst said.

At the end of FY20, the country’s nameplate crude steel capacity stood at 128.3 million tonnes (mt). It is expected to grow by five mt to reach 133.3 mt by the close of this fiscal.