Oxygen diversion to have limited impact on manufacturing sector: Analysts

Revenues of small and mid-sized companies into metal fabrication, automotive components, shipbreaking, paper, and engineering may get impacted temporarily, says CRISIL.

The diversion of oxygen from industrial units to hospitals may pose a near-term challenge for select industries, say analysts, who say the disruption is unlikely to cause a long lasting damage in revenues of the impacted companies. However, a prolonged and intense second wave that curtails oxygen supply to industries for a longer period than expected will exacerbate downside risk in affected sectors, they say.

“The disruption in the supply of oxygen for industrial use would temporarily impact the revenues of small and mid-sized companies into metal fabrication, automotive components, shipbreaking, paper, and engineering. These typically do not have captive oxygen plants and source their requirement through merchant suppliers for operations such as welding, cutting, cleaning and chemical processes,” explains Gautam Shahi, director at CRISIL Ratings.

The disruption in oxygen supplies for industrial use, according to CRISIL, will be for 6 to 8 weeks. Affected sectors, it believes, can partly manage their oxygen requirements with inventory for now.

“Therefore, we expect only a limited decline in revenue for them. Their credit profiles are expected to be stable,” Sahi said.

Those at Prabhudas Lilladher, too, echo a similar view and expect select sectors to be impacted as the oxygen gets diverted for medical use.

“Certain manufacturing sectors (viz steel, cement and mining), which stand dependent on raw material and oxygen (for instance, molding, fabrication, auto parts etc.) are likely to get impacted in the coming fortnight,” wrote Shweta Daptardar of Prabhudas Lilladher in an April 17 note.

Soaring demand

The demand for medical oxygen has shot up across India in the backdrop of a sharp rise in critically impacted Covid patients. As a result, the central government has barred industrial use of oxygen (except nine industries) from April 22, 2021. Ampoules & vials, pharmaceuticals, petroleum refineries, steel, nuclear energy, oxygen cylinder manufacturers, waste water treatment, food & water purification and process industries with uninterrupted operation of furnaces are the nine industries that have been permitted oxygen use, as per reports.

“Demand for medical oxygen is estimated to have rocketed five-fold in the second week of April versus pre-pandemic levels as Covid-19 infections took off,” CRISIL said. According to industry figures, the pre-Covid demand for liquid medical oxygen (LMO) before the pandemic was 700 tonne per day (TPD) across the country. During the first wave of Covid-19 last year, the demand for LMO increased four times to 2,800 TPD. READ ABOUT IT HERE

Industry consumes oxygen in two ways – onsite, and merchant sales. Onsite use is via captive plants for process-driven industries (including the nine sectors exempted by the government), which account for 75-80 per cent of oxygen manufactured in India. The balance 20-25 per cent, reports suggest, is supplied through merchant sales (called liquid oxygen) through cryogenic tanks and cylinders. The healthcare sector consumes around 10 per cent of merchant sales, and others the rest, CRISIL said.