India is the world’s fourth largest producer of steel. The production capacity in India grew from about 75 million tonnes per annum (MTPA) in 2009-10 to about 101.02 million tonnes (MT) in 2013-14, while the output was reported at 81.7 MT.
India produced 7.07 MT of steel in the month of January 2015 reporting the fourth highest production level globally which saw 1.7% increase over January 2014. The steel sector in India contributes approximately 2% to the GDP and the per capita consumption of total finished steel in the country has risen from 51 Kg in 2009-10 to about 60 Kg in 2013-14. India’s steel consumption grew 6.9% to 20.076 million tonnes (MT) in Q1FY16 over Q1FY15.
The dumping of steel into India has caused a huge pressure on the net sales realizations and the margins of Indian steel companies. The capacity utilisation by the Indian steel companies was reported in the range of 75-80%, with 20% of the 110 MT installed capacity lying idle. The Indian companies are finding it difficult to compete with those in China, Japan and Korea due to higher interest, iron ore and transportation costs in comparison.
Jindal Steel and Power Limited was recently downgraded to A+ from the earlier AA- in its credit rating on account of added pressure on its debt due to lower sales realizations in the steel business and power business.
Companies from China, Korea, Japan and Russia have increased their exports to India by 54.6% to 2.57 MT on a year on year basis. China, Japan and Korea are the three major exporters of steel to India cumulatively, contributing around 75% of the total 9.3 MT steel imported in FY 2014-15. Globally there is a structural oversupply of steel and producers all over the world are relying on exports to tackle the problem.
The Government of India has announced a 2.5% increase in customs duty on flat and long steel products, for protecting the steel industry, which is passing through a tough phase due to a crash in global prices and over-capacity in countries such as China. Apart from customs duty hike, the industry players want imposition of safeguard duty as an interim measure to thwart the massive steel import inflows as minor import duty hikes have largely remained ineffective.
India has free-trade agreements (FTAs) in case of steel products with Japan and Korea and proposes to enter into a free-trade agreement with China with the signing of a Regional Comprehensive Economic Partnership (RCEP). Taking advantage of the duty benefits under FTAs, steelmakers from Japan and Korea have already become a serious threat to the Indian steel industry. With a huge exportable surplus, China is not just a growing threat for India, but to almost all the steelmaking nations in the world.
Domestic steelmakers have urged the government to keep steel out of the purview of any future FTAs and also review the existing pacts to ensure that their interests are safeguarded. A provisional safeguard duty of 20% has been introduced on certain steel products for a period of 200 days but the pressure on the margins would remain in the remaining quarters of FY 2015-16 if the Government is not able to reach a feasible solution for the steel industry in the long run.