Despite the upcoming monsoon season, steel production is expected to increase in the near term as the economy limps towards normalcy. Davis Index spoke to Aditya Jajodia,Chairman and Managing Director at Jai Balaji Industries, a steelmaker in Kolkata, to understand how demand and supply situation is likely to pan out as the COVID-19 lockdown starts to ease. Jai Balaji is an integrated mill, producing steel for the domestic and export markets.
“Demand in monsoons is usually sluggish in India. Production levels are thus adjusted accordingly. But since most mills are running at lower capacity due to COVID-19, production is expected to increase compared to the current levels. Year-on-year, production levels are expected to be at par with 2019 levels, mainly due to a thrust towards exports.
Jajodia further added that the outlook for the economy as whole looks grim in March ending FY 2021. “Job losses, production cuts and reduction in consumer demand will plague the economy. The financial system is expected to be under duress,” he says.
During the pandemic, most small and medium-sized mills in different parts of the country were completely shut. Those running had severely curtailed production, informs the CMD. These mills, he said, will face a large burden of fixed costs. “No relief is available in the economic package to deal with these,” says Jajodia. These losses will pile up pressuring the profit and loss account as well as the cash flows of these companies.
Further, most mills had stocked iron ore with mining auction and change in ownership of many major Odisha mines on the cards. These inventory losses will also compound their woes. “These units may take a considerable time to recover from this black swan event and companies will be under severe liquidity stress,” says Jajodia.
Amid this negativity, Jajodia states there is still hope for the steel industry. “The Indian government has pledged to spend a considerable amount on infrastructural development of the country, thus boosting demand for steel. Issues faced on account of severe manpower shortage, as well as logistical and supply chain disruption could stall the production from reaching its peak,” he says. Jajodia further adds it may take a few quarters or even years for the financial robustness to come back and capacity utilisation to reach the pre- COVID-19 levels.
Exports to keep steel prices firm
Despite an unsupportive demand, prices of finished steel are at pre-COVID-19 levels. Before the pandemic, these prices were expected to rise. But with slow downstream demand and relatively rapid pace production, prices were tagged to fall. Only a sustained and increasing export trend has kept prices intact.