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Steel & cement companies to face demand contraction of over 20% in FY21

Domestic demand for steel and cement, two commodities that are key to undergirding physical infrastructure, is set to collapse in FY21 as India’s economy heads for its first full-year contraction in nearly five decades. The fortunes of both industries are closely correlated with the rate of broader economic expansion.

Steel demand locally could shrink by a fifth, and that of cement by an even steeper magnitude, compromising profitability and capacity utilization at the two industries in which India ranks second only to China on the global output leader-board.

Leaders of both industries are looking at the second half of FY21 for demand revival, with government expenditure on infrastructure seen as crucial for lifting demand.

"I see India getting back to normalcy, hopefully, in the second half of FY21,” said JSW Steel Joint MD Seshagiri Rao. “We see traction from government-induced expenditure related to transmission, distribution, solar, metros and pipelines."

Lower profitability and sales would weaken the industry’s credit profile, with Icra anticipating total debt at 7 times of operating profits at steelmakers, a level last seen during the FY17 meltdown.

Demand in Tatters

With construction, auto and general manufacturing brought to a near standstill, thesteel industry’s prospects have dimmed, Crisil Research said. Companies are focused on managing liquidity and cash flows in the near term, the report said, citing management responses.

Brussels-basedWorld Steel Associationalso said that India’s steel demand may fall 18% to 83.3 million tonne (mt) in 2020 from 101.5 mt in 2019.

Saurabh Bhatnagar, Partner- Metals & Mining, EY India said demand revival would intially depend on government infra spending.

"The best thing the government can do to revive the economy is to accelerate spending on infrastructure - railways, ports, roads, slurry pipelines etc – to help drive demand," a Tata Steel spokesperson said.

An ArcelorMittal Nippon Steel India (AM/NS India) spokesperson also said government expenditure on infrastructure is key to demand revival.

Although exports could help increase capacity utilization, overseas shipments can’t help compensate local demand that’s north of 100 million tonnes – bigger than the output of Japan, the third-largest producer.

"It is not easy to make it up with exports. Also, we are exporting very basic products like semis which grew by 66%, and finished product exports are actually lower by 17%," said Jayanta Roy, Senior VP, Icra.

Concrete Cracks

Demand for cement, the world’s most-used manufactured commodity, would also decline sharply in FY21, with the protracted lockdown halting construction during what is considered the peak season in many parts of India.

Given the uncertainty, the companies are focused on trimming costs and conserving cash, as demand revival must wait until the end of the monsoons during which construction is usually rare in most parts of India.

“Conserving cash is the biggest motto for us this year. Running a negative working capital cycle has been the key," Atul Daga, CFO of the largest company, UltraTech, told investors after the March quarter earnings. The Aditya Birla Group major has targeted a 10% reduction in overheads in FY21.

Lower input costs may help maintain the usual operating margins of 21-22% in FY 21 as raw material costs have fallen even as prices have risen marginally.

"However, volumes will see a significant dip in FY21. Ebitda/tonne might reach Rs 1,000-1,200," said Binod Modi, senior research analyst, Reliance Securities.

Labour migration and bottlenecks in logistics, an industry that makes up about a third of the cement value chain and costs, remain major challenges for cement plants.

"There has been significant production loss. We expect things will start to improve in H2 FY21," said Nilesh Narwekar, CEO, JSW Cement. In metros such as Mumbai, demand revival would take time, he said.


June 15, 2020

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