August brought a major sigh of relief for the metal industry as market sentiments changed and recovery in auto sector’s production and sales gave a massive push to the industry.
Auto sales – that were already low since mid-2019 amid economic slowdown — took a hit during the COVID-19 lockdown as well since production of automobiles was low, dealerships were shut, people cut consumption of luxurious items, and disposable income contracted followed by companies’ laying off employees.
Trouble before Pandemic
“Auto sectors were witnessing several structural changes even before the pandemic broke out. And the pandemic only made matters worse,” said Nirali Shah, Senior Research Analyst, Samco Securities.
Jyoti Roy, DVP Equity Strategist, Angel Broking said, “Due to lockdowns in April and May, a pent up demand along with inventory build-up prior to the festive season will lead to further improvement in auto sales over the next couple of months.” He said opening up of the services sector will also help the industry.
Tough market for Electric Vehicles
Electric Vehicle (EV) consumption has also declined recently in India, however, globally EV sales is rising and pushing prices of nickel, which is needed to make EV battery, higher. Shah explained that the push towards EV has suddenly lost steam amidst a far deeper problem, courtesy COVID-19. “Sales growth of two-wheelers which forms a major chunk of EV sales has declined from the prior year as there is no pick-up in the charging infrastructure development,” said Shah.
She further added that from a four-wheeler perspective, it seems that the EV penetration in India will remain under 5pc for some years. However, any announcement on the scrappage policy could lift sentiments and bring relief to this space.
Demand for 2-wheelers, tractors
Roy said auto companies reported strong sequential growth in July led by two-wheeler and tractor segments. Demand for entry-level two-wheeler space is witnessing recovery at an encouraging pace due to low ticket size and personal mobility preferences.
What it means for the metal industry
The auto sector is one of the major consumers of steel, aluminium, zinc, lead and other metals which are the basic raw materials. Demand for metal, which was bleak since March, started improving from July resulting in rise in prices of metals followed by healthy demand from auto sector. Several auto components are also large consumers of metals including metal forging companies.
Growth in steel’s demand is inevitable in the coming months. Aluminium is the second most-used metal after steel. Of late, aluminium has become auto makers’ “favourite” metal even for die-cast parts owing to its light weight.
Zinc which is used mostly for die-casting auto parts will also witness demand growth. A major chunk of zinc also goes into production of tyres in the form of zinc oxide. Demand for lead batteries will also push demand for lead ingots supporting its price.
Following a fruitful month of auto sales and depleting inventories with manufacturers, demand for steel is up which is pushing mills to buy more scrap. Sources told Davis Index that more finished steel is being retailed to auto manufacturers amid frail demand from infrastructure sector.
Demand from rural sector is relatively higher on the back of government impetus and a forecast of decent monsoons, said several auto manufacturing companies in their Q2 (April-June) earnings report. Major car manufacturers are also expanding production as demand for cars is expected to increase in September when the festive season begins.
Outlook for auto industry
“The outlook for the auto sector is encouraging as demand is being driven by personal mobility and buoyant rural sales,” said Aditya Makharia, Institutional Research Analyst (Auto) at HDFC Securities.
In these unprecedented times, almost all analysts and rating companies are positive of demand restoration eventually although compared to previous year, sales will be lower with April’s sales accounting for near-zero. Roy broke down the outlook for auto sales, noting that while passenger vehicle (PV) and light commercial vehicles (LCV) sales are expected to improve gradually, medium and heavy commercial vehicles (MHCV) sales are expected to remain subdued for some time.
Roy also believes the tractor segment will continue to flourish. “Two-wheeler companies operating at 90-95pc of pre-COVID levels give hope for faster than expected recovery in the segment. Though PV demand is likely to face some headwinds due to deferment in discretionary spends, entry level cars are likely to see better traction due to shift towards personal mobility on account of COVID-19 concerns. In the commercial vehicle space, LCVs will do better than the MHCV space,” Roy said.
Word of caution
Shah warned of several issues that do not portray an encouraging picture for growth in the medium term. “Higher cost of ownership under BS-VI is a consumer dampener as first-time buyers would be deterred to spend more for private transportation, given the rising unemployment and risk aversion by lenders,” Shah explained. She also cautioned that a complete shift in auto industry’s cycle will take time and seems unlikely in 2020.
An international ranking company Fitch has forecast a 20pc contraction in vehicle demand in India in 2020 from the prior year as demand continues to face several challenges. The ranking company has said that they might revise the forecast if COVID-19 continues to play spoilsport.