As coronavirus epidemic spreads, Indian steel industry may have a meltdown

In many ways, China’s industrial economy remains a riddle wrapped in an enigma. This characteristic was evident when the World Steel Association (WSA) reported recently that China, which has over 53 per cent share of global steel production, managed to lift output in January by 7.2 per cent year on year to 84.3 million tonnes (mt). The riddle is on two counts: First, January is marked by Lunar New Year holidays when manufacturing and trading are at a low ebb. But when the week-long break was over, Beijing sought to contain the damage wrecked by the rapidly spreading coronavirus by extending the holiday more than once and restricting travel. All this kept factory attendance low.
 
In such circumstances, the January steel production is logic-defying - when infrastructure and construction projects and metal-consuming downstream units, struggling to mobilise manpower, could not but depress local demand for steel in China. The WSA ahead of the virus outbreak and ArcelorMittal afterwards thought Chinese domestic steel demand would be up just one per cent this year, a tectonic change over estimated growth of 7.8 per cent in 2019 when there was a production spike of 8.3 per cent to 996.3 mt.
 
Because of the sheer size of its steel industry, whatever happens in China impacts the rest of the world, including India, always fearful of artificially-priced imports of steel products.
 
“What do you expect Chinese steelmakers, starved of domestic inquiries, to do when inventories of finished products rise sharply on the back of production spurt? They will be desperate to export as much as possible,” says an industry official here. He adds that when domestic steel sales are about one-third the pre-coronavirus level, some of China’s leading steel groups are offering price discounts of up to $55 a tonne on hot-rolled coil (HRC) to become early sellers in South East Asia in particular. For example, Hebei-based Anfeng Iron & Steel managed to sell large quantities of HRC to Vietnam last month at prices that other Chinese steelmakers found market-disruptive.
 
China’s export aggression brings bad forebodings for Indian steelmakers whose exports have ranged from a low of 6.36 mt in 2018-19 to a high of 9.62 mt the previous year. India is now likely to be robbed of the advantage of selling steel in South East Asia. Coronavirus is likely to keep up the pressure on Indian domestic steel prices in the near term. Financial services group Edelweiss says India may also have to contend with more HRC imports from Japan and South Korea offering a discount of 3 to 4 per cent over prices.

The post-coronavirus pressures on steel will automatically result in intra-year demand volatility for raw materials such as iron ore and metallurgical coal and uncertainty in seaborne supplies. An outlook report from BHP Billiton, the world’s largest miner and with a major profile in copper and nickel, says “effectively” containing COVID-19 this month could lead to an accelerated run rate in construction and manufacturing post-March, compensating for the loss in the year’s first quarter. Major erosions in share prices of commodity companies across the globe are proof of how the rapid worldwide spread of the virus, first identified in December in Hubei province capital Wuhan, has badly shaken market confidence.
 
The optics of the market look poor in the short to medium term. Three-month aluminium on London Metal Exchange (LME) has slipped well below $1,700 a tonne and at that price smelters, which do not have the benefit of use of hydel and gas-based electricity, are all losing money. The global demand fall was made worse by high January aluminium production at 5.451 mt. LME copper is languishing at below $5,560 a tonne, a far cry from over $8,000 a tonne in 2012-13. High stockpiles at LME and Shanghai confirm weak zinc demand, with the three-month LME price hitting its lowest since July 2016.
 
Crude oil has also proved to be a particularly weak asset. Brent futures are down more than 25 per cent since the coronavirus scare started making headlines. West Texas Intermediate crude futures, too, came under similar pressure on lack of enquiries and cancellation of contracts. Many companies are parking their crude on very large crude carriers.
 
In the context of global economic outlook and the virus, S&P Global Platts has sharply cut in its estimate for world crude demand growth in 2020 to 860,000 barrels per day (B/D) from its earlier projection of 1.33 million. So oil is heading for the slowest growth since 2011. This may sound cynical, but the fall in oil prices on epidemic fears will bring major relief to India, which imports nearly 85 per cent of its crude requirements. But in the immediate term, India is bracing for production disruptions in automobile, cell phone and white goods manufacturers with components supply from China drying up. Pharmaceutical companies here dependent on China for drug ingredients are suffering as supplies are thinning. In that sense, the global coronavirus epidemics has many side effects.