Steel Industry is going through one of the severest time with the global economy looking at a contraction of 3%. Unlike the Great Depression, Global Financial stress, and ILFS crisis, the Covid 19 pandemic is causing shocks on the supply side, demand side, world trade, selling of equity and debt by foreign investors as well as risk of default by companies due to stressed balance sheet.
Demand for steel products has fallen drastically as the Automotive, Construction, Oil and Gas sector are facing headwinds due to the pandemic. Weak domestic demand has led to inventory pile up which has ultimately forced steel prices to drop and erode margins for all the steel players. Talking about global demand, demand from Japan will likely erode further in fiscal 2020 as its end-user industries’ face production and demand disruption due to pandemic. South Korea will follow the same pattern owing to lower auto production and sluggish housing construction.
The Indian Steel Association, which represents major public and private sector units, said that it expected demand to contract 7.7% in 2020 because of measures taken to contain the pandemic.
China accounts for almost half of the world steel production. Chinese steel companies have already started production. Chinese Government has taken some aggressive fiscal as well as commercial measures to kickstart the economy. If China returns to its usual level of business activity, prices will become more sustainable. China is giving rebates on VAT from 10 to 13% on steel exports for boosting production and dumping steel to other countries.
Some of the measures that can be taken are enumerated below:
- Protection from Chinese Dumping:
The domestic steel industry need to be protected from dumping measures taken by Chinese. Anti-dumping duties need to be enforced again in order to keep the market competitive and ensure that use of sub-standard quality of steel is not encouraged.
- Ramping up Exports:
Adequate measures should be taken to ramp up exports. The present export is 8% of the total production. Steel companies should focus on strengthening their partnership with countries they are already exporting to and search for newer markets. Steel producers need to come up with better value added products in order to tap new markets depending on the requirement. Relaxation of regulatory norms as well as export duties of steel is the need of the hour. The government should focus on reducing bottlenecks and facilitating timely delivery of export consignments.
- Expediting Infrastructure Projects:
Infrastructure projects which had been stalled or which can be realized in short period of time should be immediately taken up on priority as this will help in escalating the demand for steel. National Infrastructure fund should be deployed in such projects and the feasibility study of projects that can be taken up should be done simultaneously.
- Overcoming Industrial Challenges:
It is important to get migrant labourers back into manufacturing/construction zones, resetting disrupted supply chains, giving breaks on electricity tariffs (Steel being power-intensive industry) and overcoming liquidity constraints particularly towards working capital needs. Moratorium period for working capital loans need to be extended so that the pandemic does not wreak havoc on the MSME’s. GST on steel coils, HRC, stainless steel, sheets need to be reduced to 5% unless and until the situation improves.
- Ease of Logistics:
Steel companies generally store about one or two month of iron ore, scrap and other raw materials close to the factory but may face difficulty in moving them through road as most state governments have restricted lorry movements. Although logistics involving essential commodities have been relaxed, more needs to be done on this front so that furnaces and other critical equipment do not shut down since steel making is a continuous process.