Domestic steel makers are likely to face muted demand and oversupply which would lead to suppressed steel prices post-lockdown, according to a report by India Ratings (Ind-Ra).
Besides, they are also expected to face issues with availability of workforce and logistics movement, the report released on Thursday said.
"Muted demand and oversupply is likely to create a loop leading to suppressed prices until either there is a substantial uplift in demand or a substantial volume goes out of the market," it said.
Ind-Ra said the nationwide lockdown has aggravated the challenges for the steel sector.
"With the relaxation in lockdown in many districts across India starting May 4, 2020, Indian steel players will look to gradually increase capacity utilisations. The key challenges in the near term are manpower availability and ensuring finished inventory to normal levels," the report said.
"While steel and its raw material commodities have been classified as essential goods, the logistical constraints may remain due to non-availability of fleet and longer trip time," it added.
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The agency said it had already revised the sector outlook to negative from stable for financial year 2020-21 in February 2020.
Domestic steel demand in FY21 is likely to drop by around 12-15 per cent year-on-year with end-use industries being closed down and limited demand growth expected over the near term.
Demand from infrastructure, construction and real estate sectors is likely to be subdued in 1HFY21 (first half of FY21) with the lockdown in 1QFY21 (April-June FY21) and the monsoon season over 2QFY21 (July-September FY21), it said.
Furthermore, the demand from automobile, white goods and capital goods sectors is likely to reduce with consumers deferring discretionary spends in the near term.
As such, government spending on infrastructure is likely to be the key driver for a gradual recovery over 2HFY21.
The agency further said that it expects an inventory build-up primarily of intermediate/semi steel products with downstream facilities of most players being closed during the lockdown.
Large producers have also kept their blast furnaces operational at lower capacity of 35-50 per cent due to the high cost of restarting the furnace in case it was to be shut.
However, small and mid-scale producers with induction/electric arc furnaces remained completely shut during the lockdown.
"The built-up inventory shall put pressure on steel prices post lockdown and the agency expects a correction of INR 3,000/MT in average realisations over FY21 on a y-o-y basis.
"As of end-March 2020, hot rolled coil prices (Delhi 2.5-8mm, IS2062) were 3 per cent lower while rebar prices were 9 per cent lower than those at end-January 2020 when there were limited concerns over the spread of COVID-19 in India," it said.
Ind-Ra said the sector will need government support in terms of keeping a close watch on imports from countries with which India has signed free trade agreements (FTA).