India’s export duty on steel has
likely put the mills’ expansion plans in limbo.
The
country has levied a 15% export duty on some steel products to boost
domestic output and cool inflation. That, however, may be a disincentive for
the manufacturers’ proposed capital expenditure.
Indian
steelmakers have lined up a capex of Rs 5 lakh crore for the next five years,
said Dilip Oommen, president at Indian Steel Association and managing director
of ArcelorMittal-Nippon Steel India. His company alone is looking to invest Rs
1 lakh crore, but this will be “under review” if the export duty isn’t rolled
back and domestic demand remains tepid, he told BQ Prime.
The duty
amplifies margin risk for steel mills. Prices have
fallen, raw material costs spiked, domestic demand failed to pick up, and
seasonally weak monsoon period has kicked off. Analysts, including at JPMorgan
and Jefferies, termed the export levy as “negative” for the sector.
In cases
where investments have been rolled out, they may continue, but the ones that
are in the “drawing stage may not go through as any investor would look for
returns”, according to Alok Sahay, secretary general and executive head at
Indian Steel Association.
“Any
market with new product additions will take time to absorb the new products
having new dimensions or a new quality parameter,” said Sahay. “During this
gestation period, exports are the only outlet to keep economies of scale in
production. If the new capacity additions are only dependent on domestic
demand, then it will, in most cases, be unviable as during the gestation period
of demand creation, exports are the only way to keep the production going.”
Tata
Steel Ltd. in an interview to BQ Prime after fourth-quarter
earnings, said though it may continue the ongoing expansion at its
Kalinganagar, Odisha, plant, it may review its long-term capex plan depending
upon domestic consumption and the imposition of export duty, since exports
constitute 10-15% of its overall volumes.
Capex
plan beyond FY25, Edelweiss Securities said, would likely be revisited in view
of the tough regulatory framework that may lead to “sub-optimal returns”.
The
deferment in expansion, if any, also poses a challenge for the government’s
target to export 5.5 million tonnes of specialty steel—high value-added steel
used in defence, space, power, automobiles and capital goods—by 2026-27 against
1.7 million tonnes at present.
Jindal Steel & Power Ltd. had said the levy
“would not be competitive” even as it sees the move
as “temporary” and expects “things to be normalised” by July.
That
probably prompted JSPL to remain committed to capacity expansion plan that’s
already in advanced stages. JSW
Steel Ltd., too, expects to stick to its road map.
Five-Year
Capex Plan
The steel
ministry has set an industry capacity target of 300 million tonnes by 2030 from
the current 143 million tonnes. The top five producers, however, have plans to
add 20 million tonnes of capacity by 2025 and another 40 million tonnes between
2025 and 2030.