Small- and mid-sized steel players are likely to face tight liquidity due to delays in the receipt of receivables and payment of fixed charges towards labour, electricity etc.,
Mumbai: Steel prices are expected to fall in the second quarter of this fiscal due to oversupply, further reducing margins for domestic steel producers. A report by credit ratings agency India Ratings and Research has estimated that prices of both hot rolled coils (HRC) and rebars will fall in the coming few months.
Both HRC and rebar prices were down 3% and 4% month-on-month in June. In May 2020, steel prices temporarily rose although higher inventories were available with steel players. This was due to logistical constraints and man-power availability issues, resulting in limited supply to end-use industries which gradually re-opened post relaxations in the lockdown.
“Domestic gross spreads per tonne (realisation per tonne of steel less the raw material cost per tonne of steel) for both hot rolled coil (HRC) and rebar are expected to fall further in 2QFY21 with a further fall in steel prices due to oversupply," the report said. “This is because domestic production will gradually increase with the easing of lockdown restrictions along with no corresponding increase in steel demand. However, rebar spreads are likely to be less impacted over the near term up to end-FY21 compared to HRC due to a likely better demand pick-up, leading to a price increase backed by the expected implementation of government spending on infrastructure."
Domestic iron ore prices in mid-June 2020 were 31% lower than mid-March 2020 prices, prior to the lockdown in India. The domestic prices have sharply corrected due to the limited demand with most steel plants operating at lower capacity utilisation levels and high inventory with some small- and mid-sized plants in eastern India dependent on Odisha miners. Furthermore, most players stocked up on an iron ore inventory of four to six months by end-March 2020, due to the anticipated risk of limited iron ore availability because of the uncertainty over the timely completion of iron ore auctions by end-March 2020.
With many blast furnaces closed in China during their lockdown, the country increased imports of billets and slabs. The increase in Chinese imports benefited domestic steel players, especially the large steel players who were operational at lower utilisation levels during the lockdown and who compensated for the dull domestic demand by increasing steel exports (majorly to China) albeit at lower margins.
Small- and mid-sized steel players (especially those within the micro, small and medium enterprises category) have been impacted more and are likely to face tight liquidity due to delays in the receipt of receivables and payment of fixed charges towards labour, electricity etc. However, most steel producers are have raised a plea for the waiver of fixed demand charges and surcharges on electricity bills and charging of the actual units consumed during the lockdown period by the respective state electricity boards as well as relaxation in terms of payments of electricity bills, till the situation is favourable for the smooth running of steel plants.