Steel firms expect no production disruption amid oxygen diversion
Market cap of top four steelmakers up 29% in April so far; demand from China is a strong tailwind
Steel manufacturers don’t expect any disruption in metal production despite the diversion of part of the industry’s captive oxygen production for medical use amid the rapid surge in Covid-19 infections across the country. Primary steel producers, such as Tata Steel, JSW Steel, Steel Authority of India, Jindal Steel & Power (JSPL), and Rashtriya Ispat Nigam (RINL) are some of the largest producers of industrial oxygen in the country through their captive plants.
Most of these steel producers are supplying liquid oxygen from their manufacturing plants to different states. Mumbai-based JSW Steel, for example, is currently supplying 600 tonne of liquid oxygen for medical use to hospitals in Maharashtra and Karnataka. The company, however, expects this to have no impact on steel production.
“In our production process, we use gaseous oxygen. What we are supplying to hospitals is called liquid medical oxygen (LMO), which is a byproduct for us during the production of oxygen for captive use. Second, total LMO supplied by us uses only a fraction of JSW’S total oxygen manufacturing capacity and metal production at all our plants is on schedule,” said a senior JSW Steel executive told Business Standard.
According to him, the company can supply even more LMO, if required. “In our calculation, we can easily supply up to 900 tonne of liquid oxygen every day, against 600 tonne currently, without affecting metal production at our units,” he said.
The central government has barred the industrial use of oxygen, except for nine sectors, including steel production. The move is likely to hit the production in steel’s downstream industries sectors, such as engineering, metal fabrication, auto component, and consumer durable.
This will likely hit demand for steel in the short term, forcing steelmakers to scale up exports or increase their inventory of finished steel.
“The disruption in the supply of oxygen for industrial use will temporarily impact revenues of small and mid-sized companies into metal fabrication, automotive components, shipbreaking, paper, and engineering,” said Gautam Shahi, director, CRISIL Ratings. He expects the disruption in oxygen supplies for industrial use to last for six-eight weeks, given the current curve of Covid19 infections.
According to rating agency Crisil, the demand for medical oxygen is estimated to have rocketed fivefold in the second week of April versus pre-pandemic levels, as Covid-19 infections took off.
This stock market is, however, not overly bothered about Covid-19 impact on metal demand in the country and steel stocks continue to outperform the broader market.
The combined market capitalisation of the country's top four primary steel producers — Tata Steel, JSW Steel, SAIL, and JSPL — is up 29 per cent in April, so far, against a 2.3 per cent decline in the benchmark BSE Sensex during the period. The combined market capitalisation of steelmakers has more than doubled (up 131 per cent) since the end of October 2020, against a 22 per cent rally in the Sensex during the period.
All major steel stocks outperformed the broader market on Monday, led by SAIL. The public sector steel major was up 8 per cent, followed by JSW Steel (3.3 per cent).
Most analysts remain bullish on steel companies given strong metal demand from China translating into higher prices for steel. China accounts for nearly 55 per cent of the global steel consumption.
Hot-rolled steel prices in China are up 20 per cent over the past month, pushing up steel prices across the globe, according to the data from Bloomberg.
Analysts say that higher demand from China will more than offset any demand softening in India, while higher landed cost of steel will provide an incentive to domestic steelmakers to take further price hikes.