Steely Resolve: Needed to tide over COVID crisis

Tamajit Pain

The Covid-19 pandemic and its disruption to industrial production has begun to impact metals production, especially steel. This comes on the heels of a difficult period for the industry in 2019, when it struggled with tariffs and experienced early signs of a demand slowdown.

Now, the industry is in a day-to-day mode of monitoring and forecasting the demand for products from end-users, including the automotive sector, oil and gas industries, and others, such as white-goods (large home appliances) manufacturers.

As this crisis plays out, metals manufacturers will need to improve forecasting related to the potential for slackening demand among downstream steel consumers – especially industries that may be classified as “non-essential.” For instance, the automotive industry, a major consumer of steel, may already be slowing down production in numerous plants.

The engineering and construction industry may experience its own slowdown – with some construction sites locked down – which could also contribute to reduced demand for steel products.

Additionally, aluminium producers and makers of specialty metals such as titanium should look closely at the aerospace and defence industry for possible signs of market demand, both on the upside and downside. However, the operational nature of the metals industry – with long leads required to idle and then restart mills and smelters – presents challenges that require nimble and swift reactions to market dynamics.

A misalignment of supply and demand could trigger an over-supply of inventories that could lead to sudden price drops. Going forward, the decision on whether metals manufacturing companies (particularly steel producers) and their major end-users are nationally classified as ‘essential industries’ may determine the level of impact on the industry. Meanwhile, metals companies are shoring up their cash liquidity and looking to short-term borrowing to help cover operating costs.

The industry is already seeing these dire expectations materialize in the sector, amid plummeting oil prices, supply chain bottlenecks, recession fears and spending slowdowns. Plant closures (even partial) at downstream, steel-consuming industrial manufacturers could be necessary for manufacturers in hard-hit regions for a prolonged period.

Indeed, uncertainty surrounding the duration (or even a deepening) of these conditions can make it difficult to see how a recovery could play out directly for steel customers and indirectly for the steel industry. Though many customers in the sector could be eligible for government stimulus support, there is a real possibility that the crisis may result in debt restructuring or bankruptcy for some downstream end-users, as declining demand, production, revenues and debt obligations take a cumulative toll.

Most companies already have business continuity plans, but those may not address the fast-moving and unknown variables of an outbreak such as Covid-19. Typical contingency plans help confirm operational effectiveness following events like natural disasters, cyber incidents and power outages, among others. They don’t generally take into account the widespread quarantines, extended school closures and added travel restrictions that may occur in the case of a health emergency. The crisis raises a number of unique challenges.

Crisis & volatility

Research agency Fitch Solutions expects volatility to continue playing to the downside for metal prices in the coming weeks owing mainly to bearish investor sentiment on the back of the widespread Covid-19 pandemic.

The pandemic scare has adversely the global steel industry, including India’s. Steel mills, in all regions, are shutting plants or cutting production – either voluntarily or forced by national governments. Steel manufacturers are closing their facilities and workers are being sent home. American steel mills are requesting to be included in a list of “essential industries” in order to prevent mandatory stoppages. Steel production is being curtailed in Europe. Long queues of trucks are, reportedly, waiting to enter certain countries. Several producers across Asia are restricting their steel manufacturing amid weakening demand.

Major producers like SAIL, RINL, Tata Steel, JSW Steel, JSPL and ArcelorMittal Nippon Steel are either scaling down or suspending operations.

One of the main issues that have cropped up from the lockdown is that 80-85 percent of trucks are not moving which is impacting dispatches.

However, while output reduces in most countries, production is rebounding in China. Moreover, Chinese traders are seeking export opportunities to offload excess stocks. Oversupply remains a feature of the Asian market, despite less severe effects from COVID-19 being witnessed, when compared with those in western nations.