India Ratings and Research expects the Covid-19 outbreak to increase downside risks for the steel sector in the near term, even as modest domestic steel prices have already begun to hurt operating margins.
However, the magnitude of the impact would depend on the evolving severity and duration within China and the spread of the virus to other parts of the world, the rating agency said. The quantum of global supply imbalance could be substantial as China produces and consumes more than half of world’s steel production.
China’s steel output, despite ongoing curtailment efforts, could outpace the receding steel consumption demand, resulting in an inventory pile-up and pricing pressures.
China’s steel output has not seen severe cuts in the north-eastern steelmaking heartland provinces such as Hebei, Liaoning and Shandong, where each province has large capacities of 100 million tonnes or thereabouts.
Moreover, keeping blast furnace capacities idle is not possible, despite the fact that steel demand in China has been severely impacted due to weak construction activity and overall consumption slowdown. Blast furnaces account for 90 per cent of China’s total steel capacity.
The demand-supply imbalance could also aggravate if the virus outbreak worsens in other large steel producing nations, such as Japan, South Korea, India, and the US.
At present, plant capacity utilisation in India hasn't been directly impacted, as there are no exports to China and no direct imports of raw materials from that country.
Indian steel producers export only around 8 percent of their total production; hence, any larger spread of coronavirus in the world (other than China) could only affect that much. India’s top five export destinations in 9MFY20, constituting 45 percent of the total exports of Rs 415 billion, are Vietnam (15 per cent), UAE (8 per cent), Italy (7 per cent), Belgium (6 per cent) and Nepal (6 per cent).