Back to old normal: Robust demand propels metals to pre-Covid levels

In the third instalment of a four-part series on how some of the defining numbers in key sectors are springing back to the pre-pandemic level, Ishita Ayan Dutt looks at India's metals industry

The attempt by major economies to spend their way out of a pandemic-induced slowdown – by pouring money into under-invested infrastructure – and a growing commitment to decarbonisation are fuelling a demand for metals not seen in years.
 
In the home market, despite the second Covid-19 wave casting a shadow on domestic demand in the first quarter (April-June) of this financial year, production is back at the pre-Covid-19 level of FY20.
 
Data from ICRA and Joint Plant Committee (JPC) show that steel production in the first quarter of FY22 was at 27.8 million tonnes, close to the 27.9 million tonnes in Q1 of FY20.
 
The story with base metals is similar. Daily domestic production of aluminium and zinc in Q1 of FY22 was higher than the pre-pandemic level, CRISIL Research data showed; the production run-rate for copper recovered in the fourth quarter (January-March) of FY21, but fell again in Q1 of FY22 due to the second pandemic wave. Steel production, too, dropped by eight per cent on a quarter-on-quarter (QoQ) basis.
 
However, despite a decline, the steel industry was on a far superior footing now than in the first quarter of last year, when production had fallen sharply because of a nationwide lockdown, said Jayanta Roy, senior vice-president, ICRA. That’s because production in the first quarter of the current financial year is at the pre-Covid level of Q1, FY20.
 
What has put the metals sector in a sweet spot is that current prices of base metals like copper, aluminium and zinc are at a multi-year high. The price of steel in the domestic market, meanwhile, is at an all-time high.
 
Base metal prices have rallied significantly; at present they are higher than their pre-pandemic levels, mainly because of a strong China demand, along with massive stimulus measures in major economies, according to Isha Chaudhary, director, CRISIL Research.

 
LME and domestic aluminium prices in Q1 of FY22 were up 60 per cent and 45 per cent, respectively, over a year earlier, according to CRISIL Research. LME and domestic copper prices were up 82 per cent and 77 per cent during the same period, as the metal witnessed a dual shock of demand pull and supply concerns in Latin America. LME and domestic Zinc prices were up 49 per cent and 55 per cent, respectively, supported by a strong demand from China as well as the domestic steel sector (zinc is a major end-use segment for steel).
 

Steel prices in the domestic market saw some moderation during the first quarter due to the second Covid-19 wave in India. But prices of hot rolled coil (HRC) – a benchmark for flat steel –still rose by 23 per cent in Q1 of FY22 when compared with the previous quarter, and 69 per cent year on year (YoY).
 
TMT prices – in the long steel segment – increased by 7 per cent, as construction activities were affected by localised lockdowns; the prices were up 69 per cent on a YoY basis.
 
Domestic steel prices, according to CRISIL Research’s Chaudhary, was at an all-time high, and prices in the global market were at their 2008 levels – the highest in 13 years.
 
“In earlier cycles, when commodity prices went up, the rise was driven by oil and gold. This time, it is because of metals,” said Seshagiri Rao, joint managing director and group chief financial officer, JSW Steel. What is driving metals, according to Rao, is large infrastructure spending by various governments (which requires a huge amount of steel), and energy transition across the world for decarbonisation. “Steel is required in every megawatt of wind or solar capacity that is created,” he added.

 
The same factors are fuelling demand for base metals and driving prices. On the decarbonisation front, the electric vehicle (EV) push is spurring a demand for copper. Additionally, the use of electrical energy instead of fossil fuels means more use of copper and aluminium.
 
The last boom in metals had continued unabated from 2003 to 2008, led by a heavy demand from China, which roughly consumes half the metals used in infrastructure. But companies believe that the changes are structural this time, and more sustainable therefore.
 
Tata Steel Managing Director & Chief Executive Officer T V Narendran said: “The rally in steel prices is driven by both demand-side and supply-side drivers. So, it is more structural, and more likely to endure, than the rally in 2008.”
 
Strong global markets provided support to companies, even as domestic demand took a hit due to the second coronavirus wave in April-June this year. However, demand in the domestic market had now started picking up after the second wave; there would be a boom in steel demand next quarter, said Rao.
 
Rahul Sharma, deputy chief executive officer (aluminium business), Vedanta, said: “Major consumer sectors are showing a firm recovery, and domestic demand is picking up well.” India has the second-largest annual aluminium production capacity in the world – at 4.1 million tonnes, operating at almost 90 per cent capacity utilisation – he pointed out. Sharma expects domestic consumption to increase at a compound annual growth rate (CAGR) of 8 per cent, compared with a 3 per cent global growth rate, supported by the recent policy reforms and economic stimulus packages announced by the government to boost domestic manufacturing.
 
But the Chinese government plans to release strategic reserves of aluminium, copper and zinc. Whether it offsets the environmental curbs by China and keeps prices range-bound remains to be seen. For steel, removal of rebate on exports by China, could well be a trigger for an increase in prices by Indian mills.