The Impact of Coronavirus On The Steel Industry [Updated]

steel industry covid19

Updated: 13th April 2020

Relief package for steel industry sought – Pakistans steel industry is seeking government assistance amid the corona virus downturn. Former president of the Federation of Pakistan Chambers of Commerce and executive member of Pakistan Steel Mills Association, Zubair Ali, on Saturday urged the government to open steel industry and give relief to the sector.

Updated: 12th April 2020
steel industry covid19

The devastating effect of the coronavirus pandemic can not only be witnessed in the number of human casualties that continue to climb every day, but also with the havoc it is wreaking on the global economy. As world governments begin to turn to strict self-isolation measures to contain the virus’ deadly spread, industry has begun to feel the pinch due to the slowdown in manufacturing and global supply chain volatility.

While most industries are facing market disruptions and an uncertain future, those that are operations-heavy are likely to be the hardest hit, a trend that has been observed with the airline, service, and transportation industries.

The steel industry is one of the sectors that is likely to suffer the most from the economic fallout, given that this sector was already stagnating before the crisis began. Sluggish demand and reduced manufacturing are likely to sustain the pressure on steel building prices, with a record low quarter expected in terms of sales and operating profit.

A slowdown in steel demand

Downstream demand from sectors such as building, construction, and machinery has been suffering since mass lockdown measures were put into place. Additional customers that the steel industry is dependent on, like the automotive and aerospace industry, have also ground to a halt and are likely to need additional recovery time after the pandemic passes, which has led to steel producers cutting production rates in response.

According to steelmakers, demand is expected to drop by over 50% in the next two quarters, leading to a fall in global steel production in 2020 – for the first time since 2015. It is likely that after the outbreak dies down, steel manufacturers will try to ramp up production, and the recovery of supply may restore the levels of demand. However, such distortions are likely to affect prices adversely in the interim.

Market dynamics

China being the producer of more than half of the world’s steel and the consumer of over 64% of global iron ore every year, makes the industry particularly vulnerable to fluctuations in local Chinese demand and production. However, the Chinese market has shown signs of recovery, as the government has announced several large-scale investment projects to stimulate steel production. These announcements have helped to put additional downward pressure on steel prices. However, it remains to see whether this can be sustained in the long term.

The industry is also facing massive volatility in its global supply chain, since key raw-material providers have been subjected to extensive lockdown measures. Several large manufacturers of steel including ArcelorMittal and Thyssenkrupp have reduced production and manpower in their plants. A prolonged period of inactivity could have disastrous financial consequences on the industry, as well as leave tens of thousands of people unemployed. Analysts also expect that the disruption in steel production is likely to lead to a period of excess inventory through most of the second quarter.

A need for liquidity

The impact of the lockdown on demand and the increase in steel inventories are likely to put further pressure on domestic steel prices. In order to minimise the economic impact, the government will need to inject additional liquidity into the industry to ensure that manufacturers can continue to pay worker salaries, and production lines keep going. While an initial level of government support has been announced, further monetary aid will be needed to cover operational and capital costs to ensure continuity.