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India lockdown: Steel mills in quagmire over extension, year-long recovery awaited

Singapore — As India extended its country-wide lockdown till May 3, already categorized as one of the most severest response to the COVID-19 pandemic, domestic steel companies were seen scrambling for policy support alongside planning ahead for effective epidemic control for operations, while grappling with absent demand.

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Post Indian Prime Minister Narendra Modi's announcement on Tuesday to extend the lockdown, Indian mills which were gearing up for recommencing full operations in their stand-alone downstream units, under lockdown since March 25, were seen waiting for further guidelines to be issued on April 15.

Modi indicated that gradual resumption in economic activities could be allowed after April 20 in parts of the country that were either COVID-19 free or showed improvement in containing the virus.

The economy post the lockdown is expected to be in reset mode as domestic supply chains have been unsettled, with liquidity constraints likely to emerge and migrant labor unlikely to return for work soon.

Extended domestic demand destruction

India's primary mills chose to strategize with drastic supply-side controls, as reported by Platts earlier, post announcement of the lockdown on March 24 with BF-BOF based operations heard at 30%-40% capacity utilization.

At the same time, EAF/IF based units as well as downstream companies remained shut, curbing possible oversupplies.

Th strategy to curb supplies, however, may prove ineffective as steel consuming industries remain shut, several industry sources told Platts this week.

"Let us see, if we can even operate for at least [total] 14 days in this month," a Vijaynagar-based mill source said. "We are operating with low utilization for our export orders, domestic movement is hardly there..inventories are piling up everywhere."

As per India's Ministry of Steel data for April 2018–March 2019, 47% of India's crude steel production came via BF-BOF route, 26% from EAF route and rest from IF units.

With resumption of activity in automobile and manufacturing sectors remaining fluid, HRC market is likely to remain under pressure with domestic mills expected to keep production at minimum levels.

Steel companies are also mulling exports of semi and finished steel to Vietnam and China, also evident in Platts proprietary data with Indian HRC offers to Europe heard at Eur 405/mt CFR Antwerp equivalent to $442/mt and to South-east Asia at $390-$400/mt CFR Vietnam.

"I think the focus [for mills] would remain on exports," a Mumbai-based exporter said. "As we head towards monsoon, I think any improvement in domestic sector would be only towards Diwali [festival in November 2020]."

Possibility of return to 2014-2016 price levels

Market participants foresee the possibility of a price drop similar to the 2104-2016 period, when Indian steel prices were on a downward trajectory.

Weekly spot prices of IS2062, 2.5-10 mm thick HRC delivered to Mumbai fell from Rupees 45,610/mt in early-March 2014 to Rupee 28,666/mt in end January 2016, or 37%, according to Platts assessments.

While cheaper imports from China were the main reason for the drop at that point in time, fundamental demand weakness has plagued the domestic market for nearly a year and likely to continue for a minimum of another six months, sources said.

"Because of the lockdown, construction activities, which account for over 60% of steel consumption in India have come to a stand-still," a New Delhi based industry source said.

"The automobile industry will continue its downward slide as GDP slides further, with concurrent negative impact on employment, incomes and purchasing power."

While imports into India remained an affliction during 2014-2016, those are nearly absent today with the introduction of trade remedial policies like Minimum Import Price, Anti-dumping Duties as well as Safeguard duties during the interim.

These have been able to protect the domestic industry from the vagaries of the changing global trade dynamics, with the anti-dumping reference price of $478-$561/mt putting aside any possibility of lower offers from China PR, Korea RP, Russia, Brazil and Indonesia at bay.

Imports into India from April 2019-February 2020 totaled 6.36 million mt, down 10.4% from the year before, according to Joint Plant Committee data.

"September is the minimum practical time by which demand might return, and we will have to maintain prices," a New Delhi based mill source said. "We cannot afford to sell at a loss. Who will subsidize us?"

Interim relief unlikely to benefit in long-term

As a temporary relief in the domestic market, mills are seeking special credit lines for working capital, deferred payment for statutory and mining dues as well as reduction of railway freight along-side elimination of busy season surcharge, among several others business continuity measures.

However, those are likely to provide limited recourse with the critical point being that mills will be hesitant to convert cash into stocks.

"Why would you like to produce unless you see the situation improving?" a second New-Delhi based mill source said. "It makes more sense to keep a watchful eye on production instead of blocking money into stocks."