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Coronavirus impact: Indian steel sector on high alert

Sluggish demand in China, the world's biggest maker and user of steel, has sent chills down the spine of Indian industry

February 11, 2020 / 06:36 PM IST

As China returns to work after the Lunar New Year holiday that got extended due to the coronavirus outbreak, the Indian steel industry will be hoping that the world’s largest maker and consumer of the metal gets back to business as soon as possible.

The outbreak of the virus, having claimed over 1,000 lives in China, has forced the country to pause much of its economic activity, including construction of roads, bridges and buildings. The transportation sector, too, has gone on a slow mode. These sectors are the main consumers of steel.

Even though the first few months of the year are traditionally slow for the Chinese economy, the outbreak has raised fears of the sluggishness continuing and, thus, impacting the world’s second largest economy. Already, the likes of UBS and Goldman Sachs have cut their forecasts of China’s GDP growth in the first three months.

The uncertainty has already seen much of the commodities already hitting their lowest numbers in recent times. Here are a few:

Doctor copper - called so because it is widely used and, thus, is a parameter of the economy’s health - has fallen 12 percent in less than a month.

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Prices of iron ore, the main raw material for making steel, has fallen to its lowest levels in six months. A Reuters story pointed out that 90 percent of China’s ports that ship the raw material are located in regions impacted by the virus.

Coal is another important raw material, and despite a demand for it from China, the hassle is in getting it shipped from major coal producing countries like Indonesia and Australia. With Australia announcing a 14-day quarantine on vessels coming from China, from February 1, the supply chain will be disrupted and thus making spot prices volatile. Either way, it is not good news for the steel industry.

China’s dominance

The country is the world’s manufacturing capital, and much of the world’s TVs, phones and cars are produced in China. It is the same in the case of steel, too.

In 2018, a little over a half of the world’s steel output of 1.8 billion tons was produced in China. The country’s share in steel consumption is similar.

Initial reports from the country said that local steel mills continued to produce despite a slump in demand. S&P Global Platts has said that the steel demand in China could plunge by 43 million tons, in February. That is nearly half of what India produces in a year.

The local steel association in China, the CISA, added that it’s ‘not optimistic’ of the steel sector in the first three months. Much of the hopes are for a turnaround from April onwards but that is dependent on the government stimulus.

What it means for India?

The coronavirus outbreak has entered in the central province of Hubei and its capital Wuhan. The region is also one of the biggest steel producing hubs in China.

The situation is being closely followed by the Indian steel industry. “We are closely monitoring the situation,” said a senior executive from one of the Indian steel companies.

“Apart from the impact on steel prices, the other problem could be in the supply of spare parts for the steel sector. Much of the spare parts come from China,” said the official.

A demand slump in China could flood the world market, and that could become a headache in India. Though imports have fallen recently, local steelmakers have alleged that much of steel coming into the local market is Made in China, but routed through countries with whom India has free trade agreements.

A downward trend in prices will be bad news for the likes of JSW Steel and Tata Steel, who saw their profits plunge in the third quarter of the financial year. JSW Steel’s profits plunged 88 percent, and Tata Steel suffered losses of Rs 1,229 crore in the third quarter.

Fall in rates will especially hurt as steel prices had just started going up in the last three months; and will definitely impact profitability.

The only good news at present is that new cases of coronavirus may be waning, and that would signal a rebound of the Chinese economy.

Prince Mathews Thomas
Prince Mathews Thomas heads the corporate bureau of Moneycontrol. He has been covering the business world for 16 years, having worked in The Hindu Business Line, Forbes India, Dow Jones Newswires, The Economic Times, Business Standard and The Week. A Chevening scholar, Prince has also authored The Consolidators, a book on second generation entrepreneurs.
first published: Feb 11, 2020 11:27 am