Over 80,000mt of metallic scrap is stuck at Indian ports as secondary mills face cash crunch, learnt Davis Index from major traders.
The extensive spread of the COVID-19 pandemic has forced many countries, including India to extend lockdowns. These lockdowns have severely hit steel demand with downstream industries remaining shut. Mills, are thus, unable to pay traders.
Usually, in other countries, such payments are made through letters of credit (LCs). In India, however, payments are cleared by end buyers, once the imported material reaches port. Traders who import material for the end-buyers discount documents with banks to clear dues. When the end-buyer clears payment, these documents are dispatched, along with scrap consignments from the ports.
Since finished steel demand has ground to a halt, end-buyers are unable to generate cash to pay traders, who in turn are unable to clear documents from banks. Even after the lockdown ends, it could take a few additional days for end-buyers to liquidate inventories.
Traders have already discounted documents with banks and are unable to clear material until end-buyers pay their dues. Additionally, till the time of clearance, the cost of housing these consignments, including detention and demurrage are being borne by the traders. With the lockdown extending, traders are worried about the detention and demurrage charges piling up.
Material Recycling Association of India estimates over 150,000 containers laden with scrap are stuck at various Indian ports and the average detention charges per container per day is around Rs10,000. Detention charges between March 22 to May 3 could amount to Rs60,000mn ($785.23mn), a burden too heavy for importers. The association has thus sought an extension in waiver of detention and demurrage charges from the shipping ministry.
Davis Index spoke to traders if they could push for LC-based payment structure in India to which the traders responded with doubt. “We would like to but the success rate is low. Many Indians don’t have access to bank credits,” said traders.