Tag: coronavirus impact

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More than 100 component makers have already made an advance payment to 100,000 blue-collared workers a fortnight before the scheduled date of payment.
More than 100 component makers have already made an advance payment to 100,000 blue-collared workers a fortnight before the scheduled date of payment.

Mumbai: 21 days lock down would choke fledgling Indian auto component industry with over a $3 billion or Rs 25000 crore of cash flows.

Having assured government that auto component makers will not retrench any work force including temporary workers, the part makers are urging the vehicle makers to release their timely payment and also requesting the government to extend the sops, so as to ensure that their cash does not dry up quickly.

“We now expect vehicle makers to release timely payments to ensure that there is cash in the system to deal with other responsibilities,” said Deepak Jain, managing director of Lumax Industries and president of Auto Component Manufacturers Association. “The steps taken by RBI will improve liquidity and we are hoping that the government of India, too, steps in with further monetary support.”

More than 100 component makers have already made an advance payment to 100,000 blue-collared workers a fortnight before the scheduled date of payment.

However, Jain told ET, if the lockdown extends beyond the current end date of April 14, many companies will be forced to move towards salary cuts and job cuts.

He is hopeful that vehicle makers and the government will step in to help the industry deal with this “unprecedented crisis”.

“The litmus test is ahead of us,” Jain said. “If there is no production in April, the industry may have to resort to some tough measures including job loss. And if payments are not honoured, then it may lead to a challenge of a different kind: will there be enough workforce once the situation comes back to normal?”

However, while most carmakers have assured timely payments to the vendor fraternity, there is a question mark over other vehicle makers’ ability to pay as Covid-19 crisis has made it a triple whammy for the auto industry that saw overall vehicle sales slump 16% in the first 11 months of the financial year even as companies had to invest on upgrading vehicles to meet the Bharat Stage-VI emission norms that will come into effect on April 1.

Two-wheeler makers Hero MotoCorp and Royal Enfield have already invoked a force majeure, and may not be honouring all the upcoming schedules. Also, barring Daimler, the vendors are yet to a get an assurance from the truck makers that have been severely hit because of a falling market and higher investment for BS-VI trucks.

CASH MATTERS

Typically, ancillary companies receive payment from automakers in 30 days from the day of the invoice, and thereafter payment is released in the first week and third week of every month.

According to ETIG analysis, the payment cycle effectively gets extended to 40-45 days, and for every Rs 100 crore payment delayed by automakers, a component maker has to bear incremental interest of around Rs 8 crore.

The borrowing of the auto ancillary companies could double in the next three to six months following higher working capital requirement, as several automakers have been delaying payments to vendors.

The total debt of the auto ancillary companies (having more than Rs 100 crore of market capitalisation) stood at Rs 42,833 crore in FY19 compared with Rs 37,257 crore a year before, according to Capitaline data.

The funding pains for auto vendors could exacerbate if payment by automakers get delayed beyond the third week of April.

“The debt level of the auto ancillary could double in the near term,” chief financial officer of an auto ancillary company said on condition of anonymity. “The good news in the current environment is that working capital level of the companies was not stretched before the lockdown disruption due to muted demand. This could add comfort for bankers to extend higher working capital limits.”

In the event of delayed payment by vehicle makers, ancillary companies may have to approach banks for their funding needs, increasing the debt burden of the companies.

In addition, some automakers have closed bill discounting scheme for their vendor.

In order to ease the pain for companies from clogging funding line due to Covid-19, several public sector banks have launched a scheme for companies to increase working capital limits for a short-term period.

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As far as exports are concerned, ICRA note said the rapid spread of the outbreak to countries other than China have disrupted the seaborne steel trade, and the same is likely to fall further amidst the looming uncertainty surrounding global growth.
As far as exports are concerned, ICRA note said the rapid spread of the outbreak to countries other than China have disrupted the seaborne steel trade, and the same is likely to fall further amidst the looming uncertainty surrounding global growth.

New Delhi: The performance of domestic steel makers is likely to be adversely impacted in Q1 FY2021 as a result of Covid-19 pandemic and the 21-day nationwide lockdown.

As per an ICRA note, domestic firms may have to face challenges such as weak domestic demand, which is likely to lead to inventory pile up exerting pressure on steel prices.

Though reported COVID-19 cases in China have slowed down in recent weeks, globally, there is a spike in reported cases in March 2020. This will keep the seaborne demand muted until the health situation improves.

The seaborne hot rolled coil (HRC) export price offers have plummeted in March 2020 for want of buyers. However, most large domestic steelmakers have continued production during lockdown, given the high shutdown costs.

According to Jayanta Roy, Senior Vice President and Group Head, ICRA, “The Covid-19 and slowing Chinese demand will affect global steel demand-supply balance in the near term. Healthy Chinese production growth had kept global steel production growth at 3.4 per cent in CY2019 but demand destruction in other geographies is expected to halt the growth globally. China’s steel exports are likely to remain low due to outbreak spreading in other geographies despite a recent increase in export rebates.”

“In the domestic scenario, the outbreak and nationwide 21-day lockdown will keep both production and consumption under check in Q1 FY2021. The key demand drivers for domestic steel demand – construction and the infrastructure sectors, besides the automobile and capital goods sectors, continue to witness muted or negative growth.”

As far as exports are concerned, ICRA note said the rapid spread of the outbreak to countries other than China have disrupted the seaborne steel trade, and the same is likely to fall further amidst the looming uncertainty surrounding global growth. During Q2 and Q3, a spurt in exports turned India into a net steel exporter. As for imports, increased scrutiny of shipments and weakenedrupees are expected to keep them low.

The rally witnessed in domestic steel prices since November 2019 is based on supportive international prices, but this is likely to be halted due to the outbreak. Domestic HRC prices stood at Rs 38,000 per tonne in March 2020, and given the choking of demand amidst the lockdown, a correction looks highly likely in the next quarter.

On the demand outlook, ICRA said it is not expecting a rebound in steel consumption growth in FY2021. As against a growth rate of 3.8 per cent in FY2020, consumption growth is likely to settle at around 2-3 per cent in FY2021, given that Q1 could be a very weak quarter.

With the export market also remaining tepid, and incremental capacity addition of 10 mtpa, industry capacity utilisation rates are seen to be lower from 81 per cent in FY2020 to about 79 per cent in FY2021 assuming a recovery in demand conditions in the second half.

“Margin improvement is unlikely in FY2021; consequently, Indian steel industry‘s debt protection metrics are likely to remain subdued in FY2021. The industry’s Total Debt, which improved to 2.9 times during the upcycle in FY2019, is expected to deteriorate to around 4 times in FY2020 and FY2021. The fall in the industry’s earnings can also be gauged from the credit ratio of our rated portfolio, which stood at 0.8 times in 11M FY2020,” said Roy.

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ACMA claims that over 1 lakh contractual employees have already been paid their salary for the month of March.
ACMA claims that over 1 lakh contractual employees have already been paid their salary for the month of March.

New Delhi: Due to 21-day nationwide lockdown in the wake of coronavirus outbreak, the domestic auto component industry is suffering a loss of around Rs 1,200 crore per day, the industry body Automotive Component Manufacturers’ Association (ACMA) said on Friday.

Given the unprecedented situation, the auto component industry is trying to mobilise all possible resources and assets that can help the Government and front-line workers fight the pandemic, ACMA said in a release. In a bid to mitigate the immpact of COVID-19, ACMA has sought relief from the government and also put forward the request for ease of NPA recognition norms by extending moratorium on payment of principal and interest by at least 1 year.

Commenting on this situation Deepak Jain, President ACMA, said “With complete stoppage of production in the vehicle industry and scarcity of working capital, the situation in the component manufacturing units, including the tier-2s and tier-3s has become quite acute, threatening their survival. We have requested the government for helping us with immediate relaxation of borrowing norms & statutory payments, extension of moratorium on payment of principal and interest of loans for a year, among others. We are also seeking support of SIAM and the OEMs to ensure minimal disruption of the supply chain.”

He further said, “We have requested the government for helping us with immediate relaxation of borrowing norms & statutory payments, an extension of the moratorium on payment of principal and interest of loans for a year, among others. We are also seeking the support of SIAM and the OEMs to ensure minimal disruption of the supply chain.”

The industry body said it has also created a task force that is evaluating the possibility of manufacture of facemasks, hand-sanitizers by its members.

Several component companies have shown keen interest to manufacture ventilators and members are evaluating the option to import them through their CSR funds.

The association said it has also sought guidance from the government on the standards for such equipment and the quantity needed.

ACMA has issued an advisory to all its members to maintain the safety & security of all permanent and contractual employees, ensuring no layoffs and timely salary for the month of March.

It claims that over 1 lakh contractual employees have already been paid their salary for the month of March.

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Car sales were already weak globally. The coronavirus will cause them to implode, a second tail-wind demand hit for metals.
Car sales were already weak globally. The coronavirus will cause them to implode, a second tail-wind demand hit for metals.

By Andy Home

LONDON, – France’s Recylex has just announced the temporary closure of both its German lead smelter and two battery-recycling plants, one in Germany and one in France.

The decision is due to a “strong drop in demand, especially in the automotive sector, in a context of sharply lower metal prices,” the company said.

It will surely not be the last lead producer to mothball its production facilities.

Lead is umbilically tied to the automotive sector. Lead-acid batteries account for around 80% of global usage of the metal.

And carmakers just about everywhere have halted their own production lines due to the spread of the coronavirus and the lockdowns on activity that have followed in its wake.

Virtually every industrial metal gets used in one form of another in making planes, trains and automobiles.

Particularly the latter. Collapsing automotive production and sales are generating a demand shock that is travelling up the value chain through parts suppliers to metals fabricators and on to metal producers such as Recylex.

CORE DEMAND DRIVER

Lead’s dependence on carmaking activity is the highest of any metal because the metal’s toxic legacy has seen it engineered out of other consumer products.

The lead-acid battery, however, remains the power source of choice for internal combustion engines. Even most electric vehicles use one for starting, lighting and ignition functions.

However, every other industrial metal has some exposure to the automotive sector.

Carmakers focus’ on light-weighting to meet ever tighter environmental standards has been a core driver of aluminium usage in recent years.

Just over a quarter of global aluminium demand comes from the transport sector. The ratio is even higher in developed countries, reaching 40% in the European Union, according to the European Aluminium industry association.

A locked-down global automotive sector represents a 16 million-tonne hit to aluminium demand on an annualised basis.

Look no further to understand analysts’ increasingly gloomy prognosis for the light metal. Citi, for example, is forecasting a 6% decline in consumption this year on the back of a 2.7-million tonne surplus. (“Metals Weekly”, March 25, 2020).

Steel producers are similarly exposed with automotive production accounting for 12% of global usage and other forms of transport another 5%, according to the World Steel Association.

Copper goes into automotive motors, wiring, radiators, connectors and brakes. Every internal combustion engine vehicle uses around about 22.5 kg (50 lbs) of copper, while luxury cars on average contain around 1,500 copper wires totaling about 1.6 km, according to the International Copper Study Group.

Transport accounts for around 13% of global copper demand, a similar ratio, give or take a couple of percentage points, to both zinc, which is used to galvanise steel body sheet, and nickel.

Usage of metals such as copper and nickel in the automotive sector is steadily increasing on the back of growing production of hybrid and electric vehicles (EV), which need more copper for electrical circuits and more nickel as an input for lithium-ion battery technology.

But EV makers are no more insulated from the virus than their internal combustion engine rivals, with Tesla and battery partner Panasonic both slashing activity.

In terms of industrial metal markets, the automotive sector has turned from hero to zero in the space of weeks.

DOUBLE BLOW

The demand shock emanating from the automotive sector comes in two parts.

The first is the physical closure of car assembly lines around the world.

Volkswagen, the world’s largest car producer, has closed just about all of its plants and is not making any sales outside of China, according to Chief Executive Herbert Diess.

General Motors, the No. 1 U.S. automaker, is planning to keep its plants closed indefinitely and is moving into cash preservation mode.

Fiat Chrysler Automobiles NV (FCA) has suspended activity across its North American operations until next month. Ford is hoping to restart some plants, simply to generate cash.

The question, however, is whether anyone is going to buy its pick-ups anyway.

Even if production can be restarted, sales are likely to drop off a cliff-edge. The U.S. Labor Department reported an eye-watering 3.3 million of new jobless claims last week, dwarfing anything seen in the past. That’s three million people whose last thought right now is buying a new car.

Car sales were already weak globally. The coronavirus will cause them to implode, a second tail-wind demand hit for metals.

Moody’s is now expecting global auto sales to plunge around 14% this year, compared with a previous forecast for a 2.5% drop published in February. That’s an indication of just how fast the virus is changing the automotive landscape.

Sales are expected to drop by 21% in Western Europe this year, by 15% in the United States and by 10% in China, the world’s largest car market by volume.

LIGHT AT THE END OF THE TUNNEL?

Moody’s holds out the prospects of a sales rebound next year, but the strength of any recovery will depend on both when the virus peaks and when consumer sentiment troughs.

One ray of light is coming from China, which saw car sales plunge 80% in February.

Car dealers in the country, which is ahead of the global coronavirus curve, are now pulling out all the stops to try and lure lockdown-weary customers back to the forecourts. The usual heavy discounts are being accompanies by novelties such as a free medical mask.

Beijing is also likely to try and engineer a recovery in a key manufacturing sector through subsidies, a path that has already been tried and tested in terms of encouraging people to buy EVs rather than traditional vehicles.

Something similar may have to come from Western governments, particularly those like Germany which also view their automotive sector as a manufacturing pillar.

Indeed, there may even be an opportunity to mimic Chinese policy by linking an automotive recovery stimulus to accelerated EV usage.

That, however, is a question for tomorrow.

Today, much of the world’s car industry is closed. And that’s very bad news indeed for demand for all industrial metals.

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