The Steel industry in India is expected to grow due to the positive demand from industries such as infrastructure, automobiles, capital goods, railways, shipbuilding, rural and urban construction and defence. Even though it appears as if the worst is over for the steel industry, in the current global scenario there are some factors that must be looked at. The most important drivers are the dynamics of Steel industry in China and the rising cost of raw materials for Indian steel producers.
Steel production in the world is dominated by China followed by Japan. During 2015-16, crude steel output of China stood at 789.04 MT and for Japan it stood at 104.23 MT. India has become the 3rd largest steel producer in the world with a production of 91 MT and a capacity of 122MT in FY 2015-16.
China has been tackling the problem of air pollution for quite some time now and the excess steel capacity in the country has been scheduled to be cut progressively. China – the world’s top producer and consumer of steel – said early last year it would shut as much as 150 million tonnes of annual crude steel capacity over the next five years to tackle a supply glut.
China’s total steel capacity stood at 1.1 billion tonnes at the end of 2015, as per official figures, a surplus of around 300 million tonnes. The capacity elimination target set for the 2016-2020 period has, technically, already been achieved in 2016, meaning that capacity elimination in 2017-2020 will be much more modest unless targets are increased.
The oversupply situation coupled with weak demand has paved the way for surge in exports of steel for China but has resulted in most of the major steel importing countries having imposed anti-dumping duties on steel products to protect their domestic steel industry.
In June 2014, the Indian Government in a bid to protect local industries imposed Regulatory Duties (RD) on 400 items under an SRO (Self Regulatory Organization), many of which were steel products. The RD ranged from 5 percent to 20 percent for steel items. Later to protect the domestic industry from dumping practices, the government revised the RDs up from 15 percent to 30 percent, effectively bringing up the import duties to 35 percent for a number of steel products including steel bars.
An anti-dumping duty on cold-rolled products (HS72.09) was imposed ranging from 13.7 percent to 19.4 percent and just a few days ago, National Tariff Commission came up with a final determination of anti-dumping duties ranging from 6 percent to 40 percent for galvanized coils (HS 72.10).
Chinese imports of these products will have a customs duty of 5 percent plus the RD of 5 percent with the anti-dumping duty on top; while imports from other countries will have a customs duty and a regulatory duty.
Average monthly steel imports into India fell nearly 37 per cent to around 0.67 million tonnes (MT) during April-December 2016 from over 1 MT in the year ended March 2016 (fiscal 2016), reflecting in part the success of protectionist measures at curbing imports, and a much better operating environment with a recovery in global and regional steel prices.
The government has waived basic custom duty on nickel — a key steel making raw material — in a major relief to the steel industry. The basic custom duty on nickel has come down to nil from 2.5% earlier, according to the Budget document. The import duty on coking coal and scrap continues to remain despite suggestions from the steel ministry to eliminate it. The import duty on coking coal is currently 2.5% of the import price.
If at all the regulatory duties are removed from the list of imports of steel products prices are likely to come under pressure. In a situation of rising commodity prices of iron ore and other raw materials it would become difficult for Steel producers to take strategic decision to cut prices. It looks like profitability would come under pressure in the time to come for steel manufacturers even if revenue grows due to positive macroeconomic conditions and favorable demand from industries.
The protection measures for the steel industry in India are expected to continue for a longer term unless the demand supply situation reverses the world over especially in China. This would hopefully benefit the steel industry to gain further traction in revenues and profitability.