May 23, 2022
India’s steel exports likely to take hit on 15pc tax
2022-07-05
Indian steel exports are likely to decline in the current financial year as a result of the 15pc surprise tax levied by the government over the weekend, which will also weigh on the industry's capacity expansion plans and the 300mn t/yr capacity target by the end of the decade.
India's finance minister Nirmala Sitharaman on 21 May announced an increase in export duty on nine steel products to 15pc from zero, including pig iron, hot rolled coil (HRC) and cold rolled coil (CRC) products.
The move comes just after the Indian steel sector posted record high exports of 13.5mn t of finished steel in financial year 2021-22, incentivised by high international prices on stimulus measures and the Russia-Ukraine conflict.
"Exports are due to decline by 7mn-9mn t thus leading to a contraction in utilisation levels. Capacity additions by the steel mills were planned, keeping exports in mind. A sharp decline will hamper utilisation levels in the industry as domestic demand will not be able to compensate," Crisil Research director Hetal Gandhi said.
"India may lose export opportunities now. The imposition of an export duty will help other countries take market share, which India will vacate. Rebuilding the lost ground may take a very long time, as the supply chain will be disrupted, while India's credibility as a reliable exporter will take a hit," the Indian Steel Association said.
The policy measures are aimed at reducing inflation. Domestic hot rolled coil prices touched an all-time high of 78,500 rupees/t ex-Mumbai in early April, up by 118pc from early April 2020 and up by 31pc on the year, according to Argus assessments.
"While we appreciate the efforts of the government to reduce inflation, we do not feel that steel prices are the culprit for the worldwide inflation," JSPL managing director VR Sharma said, adding there must be 2mn t of steel orders in the pipeline where either letters of credit are established or contracts are signed, which leaves the exporters with the duties.
"Indian mills operated at around 80pc of capacity last year because domestic demand was not there, even if the demand grows by an estimated 7-8pc, this 106mn t of demand from last year will probably reach 112mn-114mn t this year. There is enough capacity to take care of domestic demand and also cater to the international markets," a company official from a major steelmaker said.
The move to exempt alloy steel from export duties will not have any positive impact because it is a very special steel and not everyone has the capability to make it and it also forms an insignificant share of overall steel demand and exports, the official said. A move like this is at odds with the government's production-linked incentives scheme and "Make in India" and sell global, he added.
About 95pc of India's finished steel export basket has been hit with 15pc export duties, ratings agency Icra Research said, adding that domestic steel prices could potentially fall by about 10-15pc in the coming months as demand enters the seasonally weak monsoon quarter. Indian domestic HRC dropped to Rs69,000/t ex-Mumbai on 20 May, down by 5pc on the year on sluggish demand.
Global steel prices have also been on a downward trend given weaker demand. Argus' daily northwest EU HRC index has dropped by 23pc on the month, while the Asean HRC index has eased by 14pc on the month.
Short-lived tax?
But "this move can help the international steel market find a bottom as prices can stabilise if not increase," a steel exporter said, adding that India's current offers in Europe have fallen to as low as $950/t on a cfr basis from around $1,400/t in March and Asia has not been able to find buyers owing to the recent downtrend in prices.
"The pressure is on the steel companies to absorb the 15pc duty because global demand is low," the exporter said, adding that the only objective of the Indian government is to control inflation and not curb steel exports, so if prices come down substantially, this move can be revoked. Another steel exporter said that the duties were likely to be removed in a month's time as they were imposed to "wake the market from its slumber".
Another steel exporter agreed that the taxes may be temporary and could be revisited should domestic steel prices come down. "We do not know by how much although the domestic prices need to fall before the taxes are removed," he said. The major impact of the taxes will be borne by steel mills as most of the steel exports trade is done on a cfr basis, he added.
The policy change puts the country's target to reach 300mn t/yr capacity by 2030 under shadow. India's current capacity stands at around 150mn t/yr.
"Based on the current set of [capacity] announcements and the progress, India is likely to fall short by 25-35pc of the 300mn t/yr target," Gandhi said, adding "while, the imposition of duties on steel exports will not hinder the current ongoing expansions, we might see domestic players taking a cautious approach in the longer run."
By Sumita Layek and Deepali Sharma
Source: Argus
