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End in sight for Indian lockdown, but will the steel sector see a rapid rebound?

Highlights

Logistical bottlenecks expected

Lower demand as market edges into recovery

High inventories and outstanding contracts awaiting delivery

Singapore — As May 3 approaches steel raw material suppliers are eagerly eyeing a demand boost from India, the world's second largest steel producer.

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The date marks the potential end to a 38-day lockdown in the country which has been a testing period for the steel industry, with India's raw material demand tanking and its steelmakers pushing product out onto the seaborne market.

However, Indian market sources were circumspect about the prospects for any immediate strong recovery in trade amid concerns about a backlog of cargoes at ports causing bottlenecks, financing and cash flow issues, the pace of construction and automobile production restarts, and the strength of recovery in the wider economy.

Import bottlenecks

"We have thousands of imported containerized cargoes stuck at various ports accumulated since March. They are only clearing essential products, and with the poor flow of land logistics, there is a huge backlog now," an Indian trader said.

With bulging volumes of cargoes waiting to be cleared, importers fear that detention and demurrage charges will rack up "unbearable" costs, turning profits into losses.

"Ultimately the shipping companies will have to pass on the cost to the importers -- what can be expected when they are facing longer discharging rates and delays as well?" the source added. "They need to recover the extra days of charter cost."

Truck movements essentially came to a standstill during the lockdown as availability of drivers dried up, with priority given to movement of essential goods like food and medical supplies.

Exacerbating the buildup, which has extended to dry bulk shipments, is the exercising of force majeure clauses by many ports including Krishnapatnam, Dhamra, Mundra, Tuna, Gopalpur, Karaikal and Gangavaram.

Outstanding contracts

Some international scrap suppliers meanwhile are still holding on to contracts concluded before the lockdown, meaning steelmakers face the prospect of having to take deliveries at prices far higher than current levels.

"We still have outstanding contracts with India," an Australian scrap supplier said. "Once the lockdown is over, we can start shipment."

Sources said that a strong rebound on fresh demand was less likely to happen immediately as a result.

"Cash flow will then be an issue for some mills. Banks are not as willing to open new letters of credit at this point of time for some," a trading source said.

For the iron ore market, the prospects of a significant price rebound as the industry emerges from lockdown don't look all that high.

This is because steelmakers have significantly scaled backed operations, while domestic miners that hold high inventories will be looking for opportunities to offload them.

India's March crude steel production was estimated to be 13.9% lower than the same period last year, according to World Steel Association figures, with Q1 declining 5.3% year on year.

The much-reduced domestic demand for iron ore, and high producer inventories, has seen local pellet makers, which normally sell domestically, turn to the export market.

But local sources noted that getting their materials to ports after the lifting of lockdown might not be easy, with demand for logistics spiking beyond supply and potentially causing long waits.

Industry recovery to be slow

Given external factors such as weak global demand, supply disruptions and worldwide financial shocks, alongside factory shutdowns, reduced discretionary spending and delayed capex, S&P Global unit CRISIL forecasts a contraction in India's steel demand this fiscal year of 14-17%, with the potential for that to rise to 22-25%.

A fully-fledged recovery in steel demand will also be hampered by a possible contraction in the building and construction sector combined with lower public spending by the government.

Meanwhile supply constraints affecting the automobile sector as well as muted demand, where a gradual recovery is seen only in the second half of the year, will further drag on the recovery.

"The government will surely focus on more important task like medical, and people, like those who have lost jobs during this period," another Indian trader added. "Construction might not be a priority now, and I'm sure it's the same elsewhere."

Prior to the outbreak, 10 million mt/year of steel capacity was expected to come online in the second half of this fiscal year, but CRISIL said some of that could now be delayed, choking additional growth in raw material demand for the time being.