Global steel sector staring at increased downside risks in near-term following coronavirus outbreak, and Indian companies may face pricing pressures of about USD 30 a tonne in April-June this year, rating agency India Ratings (Ind-Ra) said on Thursday.
The agency also said that the already modest domestic steel prices impacting the operating margins of steel players.
In a report, Ind-Ra said “it expects the COVID-19 outbreak to increase downside risks for the steel sector in the near-term, with the already modest domestic steel prices impacting the operating margins”. However, the magnitude of the impact will depend on spread of the virus to other parts of the world, it added.
In China, steel output could outpace the receding steel consumption demand, resulting in an inventory pile-up and pricing pressures. The demand-supply imbalance could also aggravate if the virus outbreak in other large steel producing countries such as Japan, South Korea, India, and the US worsens.
China’s local steel demand has reduced drastically in Q120 (first quarter of 2020) creating an increased inventory pile-up of about 20 per cent year-on-year (y-o-y), leading to steel price pressures globally and restricting any major price increases in India over March 2020, the report said.
“In a pessimistic scenario of the spread of virus going beyond April 2020 up to June 2020, China 2020 steel demand growth and global steel demand growth may be impacted by 200-300bp and 200bp (basis point), respectively,” it added.
In such a scenario, the agency said, other large consumers may have a severe virus impact on their local steel consumption as well. It would keep the steel prices depressed even in the second half of 2020. It could create a larger surplus globally of around 40MT with price risks of about USD70/tonne in the first half of 2020). China steel exports in 2H20 could also bump up, subject to port logistics availability, as producers would try to offset their domestic demand and profit losses over 1H 2020.
“The China steel market would continue to witness a demand-supply imbalance, which could result in price fluctuations continuing over March-May 2020 in the range of USD30-40/tonne, while a price recovery would only come up with an appropriate government stimulus. In 2Q 20, Indian steel producers would face pricing pressures of about USD30/tonne related to import price parity with a lag, which could result in margin pressures of USD25/tonne in the base case scenario,” the report said.
Domestic (hot rolled coil) HRC prices have widened over February-March 2020, but are not sustainable any more. Moreover, margin pressures could aggravate with iron ore cost pressures building up with new iron ore premiums in place, it added. Indian HRC steel prices have firmed up by about Rs 2,000/tonne in February-March 2020.