Budget wishlist: Steel industry expects relief from taxes, logistic costs

The recent years have seen India alternating between a net exporter and net importer of steel. There was much discomfort in the government with the industry raising demand for stricter duty barriers when India’s imports of 7.83 million tonnes (mt) in 2018-19 exceeded exports by 1.47 mt.

The introduction of steel import monitoring system (SIMS) is with the objective of incontrovertibly establishing what is already within the capacity of the local industry. In the last few years, primary steel industry leaders on their own and with the help of foreign partners such as Nippon Steel and Sumitomo and JFE are making auto and electrical grades steel boosting self-reliance. At the same time, the admission is to be made that generally the Indian steel industry will have to make a lot of leeway in economising on raw materials use and improving machine and labour productivity to match the global benchmark.

But as consultancy PwC India says in a recent report: “There are certain non-creditable taxes, duties and cesses, specifically paid by the steel sector, which reduce the competitiveness of Indian steel products in the global market.” The report observes that unless these levies are removed or made creditable, Indian steel will not become globally competitive. Instead, the overhang of cheap imports will keep the local industry worried. The report says, quoting Niti Aayog, that the additional burden on steel is $80 to $100 a tonne that the government alone can remove.

Despite the limited elbow room that the present economic scene — low gross domestic product (GDP) growth and muted tax collection — offers to Finance Minister Nirmala Sitharaman to provide relief, the steel industry is pitching hope on two grounds. First, the industry with over 2 per cent share of GDP leaves an output impact of 1.4x on the economy. This besides, as the World Steel Association points out, anywhere in the world two new jobs created in steelmaking will open up 13 employment opportunities across the supply chain. Downstream industries from construction to machine building will be relieved to use globally competitive locally made steel.

Second, an industry leader says: “Since taking charge of steel portfolio in May 2019, Dharmendra Pradhan has taken steps to bring down logistics cost, create steel hubs, boost steel demand, which is way below the global average and reduce India’s over-dependence on Australia, which is periodically visited by natural disasters, for metallurgical coal. We are hopeful of the minister pleading our case for legitimate relief in the 2020-21 Budget.” Last year, India made 110.92 mt of crude steel in which the share of blast furnace-basic oxygen furnace (BF-BOF) route had a share of 49.91 per cent. To make steel through BF-BOF route, coke, which is made from metallurgical coal, acts as a reactant in BF.

As it will happen, the country being endowed with very poor quality coking coal with an ash content much above required for making coke, we have remained nearly 90 per cent dependent on coal imports. Our imports in 2018-19 were 52 mt and these are set to rise yearly in line with increase in BF-BOF route steel output. The 2017 steel policy pronouncement of scaling down the industry’s coal import reliance to 65 per cent by 2030-31 will remain elusive going by the past record in extraction of prime coking coal and setting up washeries for removing ash in coal. 

Citing this unavoidable perennial high import dependence, industry officials want Sitharaman to dispense with the 2.5 per cent customs duty on metallurgical coal, a highly volatile commodity with its prices in recent years fluctuating between $150 and $300 a tonne. Import duty apart, steelmakers are required to pay Rs 400 a tonne as GST compensation cess for use of coking coal. Import duty and GST cess on coal makes locally made steel costlier by over Rs 650 a tonne. Niti Aayog says the steel industry’s cost disadvantage of up to $100 a tonne is also on account of logistics and infrastructure deficiencies, taxes and duties on iron ore, high power and finance cost and clean energy cess.

Whether it is steel or non-ferrous metals such as aluminium and copper, many Indian groups match the best in the world in efficiency in conversion of raw feedstock in metals. Where they lose out in price competitiveness is because of the raft of import levies on raw materials not locally available and some local costs over which producers have no control. Tata Steel Managing Director T V Narendran famously says which is corroborated by JSW Steel Joint Managing director Seshagiri Rao that much of world class efficiency within mills is compromised in terms of cost by poor logistics involved in ingress of raw materials and egress of finished steel products. Therefore, beyond whatever comes as Budget relief, New Delhi will have to look holistically at what all needs to be done to make India made ferrous and non-ferrous metals globally competitive.
 

In the meantime, hopes are running high in the aluminium industry that the finance minister will finally end the inverted duty regime, which means customs duties on not locally available raw materials are higher than on primary aluminium, when she presents the Budget on February 1. Let’s consider non-fuel grade calcined petroleum coke (CPC), which along with coal tar pitch (CTP) are used for making carbon anodes used in aluminium smelters. Even though CPC with maximum sulphur content of 3.5 per cent used for aluminium making is scarcely available in the country making imports imperative, the customs duty on the raw material was ill-advisedly raised to 10 per cent from 2.5 per cent in December 2017. Bizarrely, however, the import duty on primary aluminium is at 7.5 per cent.

The silvery white metal is smelted from powdery alumina extracted from bauxite. As it will happen even while the country owns the world’s fifth largest bauxite reserve and much of that high grade, the country’s import reliance on this intermediate chemical is close to 35 per cent. This would not have been the case had the government proactively created condition for opening of new large bauxite mines. In any case, the customs duty of 5 per cent on calcined alumina raises manufacturing cost of the metal giving an advantage to foreign aluminium suppliers, including China. Alumina alone has a share of 40 per cent of the cost of making the metal.

India is a net importer of caustic soda, the principal raw material for making alumina. Here also, imports raise the issue of inverted duty structure. Caustic soda invites import duty of 7.5 per cent while the finished product alumina has an impost of 5 per cent. An industry official says that in the last five years, aluminium production cost is up around $420 a tonne while LME aluminium is down from $2,290 a tonne to $1,800 a tonne. In its plea for relief in the Budget, the industry urges the government to do a review of China’s stand on raw materials imports.