The government has been taking measures to counter the devastating impact of the Covid-19 pandemic on the domestic steel sector. The Production Linked Incentive (PLI) Scheme, amendment to the domestically-manufactured iron & steel products (DMI&SP) act and push to infrastructure development are likely to ensure revival of steel demand.
One of the key problems facing the steel sector currently is the scarcity of main raw material- iron ore in the domestic market which has in turn increased steel prices substantially. Iron ore exports from India shot up 62.8% during April-November 2020 as compared with the corresponding period of the previous year. This was over a high base of 140% growth during April-Nov 2019. Steel companies and miners are exporting iron ore due to higher export realisations despite shortage in domestic market which is severely impacting the smaller secondary steel players who do not own captive iron ore mines. Consequently, steel production by secondary steel players fell by 6% yoy during April-November 2020 while production by the top 6 integrated steel producers, who own captive iron ore mines grew by 7.5% yoy during the same period. The government need to take steps to reduce export of raw material- iron ore and iron ore pellet to bring down the cost for secondary steel players.
India is one of the lowest cost producer of steel in the world. However, the various taxes, duties and cess increases the steelmaking cost and makes Indian steel uncompetitive in the global market. This is in contrast with China where the government heavily subsidies production cost for the domestic industry. As per Niti Aayog, after the various taxes, duties, cess, royalties and logistics cost the final steel prices increases by $ 80-100 per tonne, $20 per tonne higher than its competitor, China. This therefore calls for reforms.
The domestic steel industry seeks reduction in customs duty on different types of coals mainly (coking coal and met coke) for which domestic substitution is not available and the industry has to largely depend upon imports. Despite the unavailability in the domestic market, import duty on coking coal and metallurgical coal currently stands at 2.5% and 5%, respectively. These duties need to be reduced to nil in order to lower steelmaking cost.
Import duty on steel currently stands at 15% which protects the domestic steel industry from dumping of cheap imports. However, there are some bilateral and Free Trade Agreements too which incentivise imports. Therefore, additional measures to curb imports from certain FTA countries like Japan and South Korea which have found to be violating the FTA norms are also likely.
An increase in customs duty on specific grades of steel, which has seen significant increase in import’s is expected. In October 2020, 48% of total steel imported could have been sourced domestically, as per data from Ministry of Steel. Screw bolts, stranded wire, ropes and CR Coils are some of the items that were imported despite being available locally.
Allocations: The government is expected to continue to spend on infrastructure and construction. This is likely to result in higher budget allocation for these sectors which will provide support to the steel industry.
The budget allocation for steel industry is expected to give significance to domestic production of steel that involves high end value added steel like automotive steel for high end applications, electrical steel (CRGO), special steel and alloys for power equipment, aerospace, defence and nuclear applications, rails for railways among others.
Rawat is Deputy Manager, Industry Research, CARE Ratings Ltd
