Metals & Mining- ESMA or not, last-mile supply disrupted, demand collapsed

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 We expect all major steel, non-ferrous plants to be shut/operate at significantly reduced
levels of utilization in the next 7-10 days and expect Q1FY21 to be a record-low quarter in
terms of both top-line and EBITDA/PAT on the back of exceptionally weak demand.
 While steel and allied activities, including mining, have been covered under ESMA
(Essential Services Maintenance Act), the non-ferrous industry has largely been out of the
purview. Those companies, having continuous processes like smelters and potlines, are
trying to impress upon the govt to have these factories also be given the same status as
that of the steel industry.
 Hindustan Zinc has shut down all major operations at its plants and mines and is only
running essential services. Similarly, Hindalco has also announced the shutdown of all
operating activities, barring essential activities at its plants and mines. We expect Vedanta
to make similar announcements for its aluminum business in India.
 In response to the shutdown in US automotive facilities by Ford, General Motors and Fiat
for up to 31st March, Novelis has also shut down its Oswego facilities which supply
autobody sheets to these automotive plants.
 While the steel companies are receiving key raw materials such as iron ore, coking coal
and limestone through rakes, they are still dependent on road movement for a variety of
other minor raw materials such as ferro alloys. Hence, despite getting exemption under
the ESMA, we expect all major steel plants to reduce operations significantly over the next
7-10 days. We expect them to keep only critical operations in a standby mode to help them
re-start and ramp up production as soon as the govt removes the nationwide lockdown
with minimum restart costs.
 We also note that while rake movement has not been stopped, the end-customer in most
of the cases is either operating at near shutdown levels (automotive, construction) or is
unable to receive material (traders) as the last leg of the delivery generally happens
through trucks. Our interactions with the industry participants confirm that the shipment of
iron ore in Odisha from trucks has also been stopped since midnight, though rakes
movement are continuing.
 Most of the steel plants are already running at significantly reduced employee levels, and
consequently with reduced output as well. However, as per the advisory issued by the
Ministry of Labour and Employment vide its letter dated March 20, 2020, all employers
have been advised not to reduce wages or terminate the employment of
permanent/contractual workers even if they are not reporting to duty due to reduced
operations at the plant as a result of Covid-19. We believe this is the right step in these
exceptional circumstances and expect all companies under our coverage will likely comply
with this advisory from the Ministry.
 If the govt, after conducting significantly higher number of Covid-19 tests, comes to the
conclusion that the severity of the outbreak is much more than what the current numbers
indicate, we believe the nationwide lockdown might extend further, and as a result Q1
could be a washout for most of the companies under our coverage.

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