In a major policy shift, China has withdrawn export rebates on major finished steel products and cut import duty on various semi-finished, crude, and scrap steel.
As per the latest announcement, China has removed VAT rebates on exports of 146 steel products from May 2021. It includes key export products like hot-rolled coils (HRC), wire rods, and rebar. China has also cut import duty on pig iron, crude steel, and steel scrap. Further, it has raised export duty by 5% on high silicon steel, ferrochrome, and foundry pig iron.
Decoding the Move
This latest policy shift indicates that China's government is attempting to curb steel exports while concentrating on resolving the domestic shortage. China has been developing this strategy for some time, and this latest step is in line with it. The Chinese government had earlier put restrictions in Tangshan, China’s largest steelmaking city, to keep domestic steel production down in 2021.
Indian Steel Makers in a Sweet Spot
China’s withdrawal from the export market will reduce the supply of steel in the global market. The reduced supply will keep steel prices higher in the international market.
As per the Kotak Institutional report, China's steel production growth rate is set to decline from 6.2% in CY20 to 2.6% in CY21 with this move. It is likely to decline further to 1.5% in CY21.
At the same time, global steel use is set to increase to decadal highs in 2021-22E. It is expected to grow to 81% in 2021 from 77% in 2020. It is set to increase further to 82% in FY22.
Considering these tailwinds, China's export curbs have come at the right time for Indian steel manufacturers. The domestic demand is facing troubles due to a sharp increase in steel prices and the second wave of COVID-19. Yet, export markets are thriving given the economic recovery. And, domestic manufacturers have a vast opportunity to expand in that market.
Room for Fresh Price Hikes
Indian steel manufacturers find themselves in a particularly strong position as they have significant room for further price hikes. Domestic HRC prices increased by Rs 5,000-7,000/ton in April 2021. But, it is still trading at a 15% discount to imported steel.
As per the Kotak Institutional report, HRC prices are expected to see a hike of another Rs 5,000-6,000/tn in May-June 2021. With large steel demand expected from the export market, prices of iron ore and other key raw materials are also expected to rise in the coming months.
Closing Comments
With the export market opening up, steel margins are poised for an earning upgrade. With all the economies under the rebuilding phase, a strong supercycle in steel is under making. It offers a great opportunity in this space for investors in the next few years.
