The Brief: The Steel Dilemma

AS INDIA RACES to be a global hub for steel manufacturing, the recently imposed export duties threaten to take the sheen out of the industry. Companies are looking at a subdued Q2 this fiscal against a year ago, since most have lost substantial business in overseas markets.

In May, the government imposed a 15% export duty on a range of finished steel products to improve domestic availability, rein in skyrocketing steel prices and control inflation. The average monthly price of hot-rolled coil (HRC) — a benchmark for flat steel — had risen to a record ₹76,000 per tonne in April 2022 and remained elevated at around ₹72,500 in May, compared with ₹66,000 in May 2021 and ₹35,900 in June 2020. The price has been around ₹55,000 in September.

The duty was imposed on eleven items, including hot-rolled coil and cold-rolled coil (CRC), which accounted for almost 95% of finished steel exports in 2021 and 2022. A 50% export duty has also been levied on iron ore and 15% on pig iron. As an incentive, the government waived off customs duty on import of a few raw materials, including coking coal and ferronickel, used by the steel industry.

Finance minister Nirmala Sitharaman had said in a tweet that the duty revision on iron and steel and their raw materials was meant to tame prices. “We are calibrating customs duty on raw materials and intermediaries for iron and steel to reduce their prices,” the finance minister had said.

Finished steel exports accounted for 10-11% of the domestic production in the last two years. In 2021, 18.5 million tonne (MT) of steel was exported and Indian companies recorded a 25% annual growth in finished steel exports. In May, exports declined by 36% and by 52% in June and 75% in July. During June-July, the export of finished steel was around 1.02 MT, 65% lower than 2.88 MT exported in the corresponding period of the previous fiscal.

The export trend had picked up during the lockdown when the domestic market was shut. Steelmakers, including biggies like Tata Steel, JSW Steel and ArcelorMittal Nippon Steel, were able to run their plants by exporting the produce. Many Indian companies even exported steel to China, where industrial activity was ongoing.

The tax has made exports significantly less attractive for companies, who have approached the steel ministry for the same. Key importers, including Europe, Middle East, Vietnam and others placed at least 50% fewer orders with Indian producers during May-June, according to industry sources. Steel from competitors such as China, Japan and South Korea was cheaper compared to Indian steel. The fall in demand leading to seasonal weakness and recessionary pressures in the global market also played spoilsport.

“We should have an export ambition for steel rather than an export tax,” says T.V. Narendran, CEO and managing director, Tata Steel. “No other industry has announced the kind of capital expenditure that the steel industry announced in India. The government should encourage the industry to build more capacity and export to the world,” he adds.

Sajjan Jindal, chairman, JSW Steel, sees export duties as a short-term headwind. “We continue to engage with the government on this matter and believe that the duties would be withdrawn once inflation moderates,” he said in the company’s FY22 annual report. Joint managing director and group chief financial officer Seshagiri Rao recently said the export duty has not only hurt the steel industry, but also the economy. Exports in the current year have already fallen more than 50%, Rao had said.

The imposition of export duties has sent a discouraging signal to investors and adversely impacted capacity utilisation and expansion projects under the production-linked Incentive (PLI) scheme. According to industry body, the Indian Steel Association (ISA), India has been increasing its exports over the last two years and has the potential to become part of a larger global supply chain. But, “it may lose the opportunity now and the decision could also impact the overall economic activity in the country,” the association said.

“The steel industry in India has made the largest investment commitments ranging from 36% to 40% of total investments committed by the entire manufacturing sector,” the ISA added.

The government is actively studying the issue of export duty imposed on certain grades of steel, Union steel minister Jyotiraditya Scindia said recently. “This is something which is under active study by my department as well as the government. We are certainly discussing this at the highest level,” Scindia had said. “I have written to the finance ministry on a number of issues facing the steel industry. I will be in discussions with the finance ministry and based on the discussions the government will take a considered view on all those issues.”

The Centre wants steel prices to come down since it will help tame inflation and increase infrastructure investments. The cost of oil imports following Russia’s 30% discount after the Ukraine war is a case in point.

If the government puts pressure on reducing exports, expansion plans of companies will not be viable, says an industry executive.

“The demand in the domestic market grows slowly depending on the progress of infrastructure projects. We need an alternative market for the capacities that we create. We spend billions of dollars on building plants. We cannot keep the capacities idle until domestic demand picks up,” he adds.

The government earlier said the duty was a temporary measure to deal with inflation. According to sources, top officials of finance and steel ministries reviewed the export duties on steel and iron ore in late September, but did not take any decision since recession fears are high in Western economies.

Reduction in duty may be considered after stabilisation of volatile market condition, cooling of inflationary pressures and looking at steel price trends in the next quarter, the steel ministry had said.

Domestic steelmakers have been facing multiple headwinds in the form of higher raw material prices, export duties and falling demand. However, the steel ministry is confident of a pick-up in domestic demand after the monsoon because of the Central government’s emphasis on building infrastructure across the country, which is likely to put upward pressure on prices.

“The government also wants to ramp up infrastructure creation in the country before the coming state elections and national election in 2024,” says a Mumbai-based expert. The duty will help the government to keep the steel prices low, but it will force the steel companies to cut down their capital expenditure plan.