Lower oxygen supplies to temporarily impact five sectors

Demand for oxygen skyrocketed five folds. To keep up oxygen supply to hospitals, government barred industrial use of oxygen except by nine sectors.

Lower oxygen supplies to temporarily impact five sectors

With demand for medical oxygen soaring, the central government has barred industrial use except by nine sectors from April 22, 2021. The nine sectors which can use oxygen are—Ampoules & Vials, Pharmaceuticals, Petroleum refineries, steel, nuclear energy, oxygen cylinder manufacturers, waste-water treatment, food & water purification and process industries with uninterrupted operation of furnaces.

Lately demand for medical oxygen is estimated to have rocketed five-fold in the second week of April versus pre-pandemic levels as Covid-19 infections took off. The consequent higher supply of medical oxygen will save lives, but will have a bearing on some sectors.

“The disruption in the supply of oxygen for industrial use would temporarily impact the revenues of small and mid-sized companies into metal fabrication, automotive components, shipbreaking, paper, and engineering. These typically do not have captive oxygen plants and source their requirement through merchant suppliers for operations such as welding, cutting, cleaning and chemical processes,” says Gautam Shahi, Director, CRISIL Ratings.

Setting up an air-separation plant or importing oxygen requires significant lead time and involves relatively prohibitive cost, so is not a viable option. That leaves them more vulnerable compared with larger peers.

Oxygen is consumed by industry in two ways – onsite, and merchant sales. Onsite is through captive plants for process-driven industries (including the nine sectors exempted by the government), which account for 75-80 per cent of oxygen manufactured in India. The balance 20-25 per cent is supplied through merchant sales (called liquid oxygen) through cryogenic tanks and cylinders. The healthcare sector consumes ~10 per cent of merchant sales, and others the rest.

Says Sushant Sarode, Associate Director, CRISIL Ratings “At this juncture, we believe that the disruption in oxygen supplies for industrial use will be for 6 to 8 weeks. Besides, affected sectors can partly manage their oxygen requirements with inventory. Therefore, we expect only a limited decline in revenue for them. Their credit profiles are expected to be stable.”

However, a prolonged and intense second wave that curtails oxygen supply to industries for a longer period than expected will exacerbate downside risk in affected sectors.

The impact will be greater for companies in Maharashtra, New Delhi, Rajasthan, Madhya Pradesh and Gujarat, where medical oxygen demand has increased multiple times due to high Covid-19 case loads.

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