A small increase in the import duty on steel matters little for steel companies, whose problems range from weak domestic demand to rising imports and falling prices.
A bigger hike may have affected end-user sectors as well.
While the duty hike itself may be insufficient, combined with a few developments, it does offer some hope for steel makers.
The import duty on steel has been hiked by 2.5 percentage points, with the revised duty on flat steel products at 10% and long steel products at 7.5%. The hike is designed to stem a flood of imports from countries such as China and Russia.
In April-May, the government’s Joint Plant Committee (JPC) data shows that steel imports rose by 54.5%, continuing a trend seen in FY15.
The global demand for steel has been weak, even though output has not fallen much, leading to surplus steel flooding world markets.
In FY15, Indian companies were also hampered by an adverse exchange rate situation. While the rupee stood relatively firm versus the dollar, emerging market currencies tumbled, especially the Russian rouble. Domestic producers were at a disadvantage.
Of late, things have improved on this front. The rupee has been depreciating gradually of late, and is up 6% over a year ago and by 2.8% since end-March. That gives some support to the domestic industry.
The declining global iron-ore prices are another concern. Though costs decline, buyers of steel have a better bargaining power and force steel producers to pass on these benefits by cutting prices. That has led to steel prices declining. But iron-ore prices appear to have recovered and are trading at around $60 a tonne, after having fallen to below $50-levels. Even now, they are 40% down from their year-ago levels. Prices could fall again, and have even turned soft in recent weeks. But if they can hold on to most of their gains for a few more months, it should give some support to steel prices.
A Dolat Capital research note dated 18 June points to a $20/tonne decline in steel prices in the past month. The duty hike should help.
Fitch Ratings estimates the landed cost of imported steel products could increase by Rs.500-1,100 a tonne because of higher duties. The risk is that importers may lower prices further to negate these hikes.
Lastly, JPC data show a 7% increase in steel consumption in April-May, over a year ago. That seems too good to be true. Low growth a year ago is only partly responsible. If this growth continues, especially post-monsoon, it may be the beginning of a revival in consumption. That will be good news for domestic steel companies.
Source: Live Mint