 "Steel")
On Monday, the government imposed a 20 per cent safeguard duty on some imported steel products for 200 days: flat hot-rolled coils used in automobiles, consumer electronics et cetera.
The World Trade Organisation allows such temporary relief to domestic industry if it suffers injury from cheap imports. The Directorate General of Safeguards in the Central Board of Excise & Customs, acting on a request made by Essar Steel, JSW Steel and state-owned Steel Authority of India, found that "increased imports have caused or are threatening to cause serious injury to domestic players".
The imported steel came largely from China, South Korea, Russia and Japan. Of these, India has free-trade agreements with two, South Korea and Japan, which allow them to export to India at a very low duty. Imports from South Korea have doubled and from Japan have shot up by two-thirds after India signed free-trade agreements with them in 2010.
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Indian steel makers say that, because of the global slowdown, especially in China, there is significant excess steel capacity in the world: against the demand for 1,537 million tonnes, the capacity was 2,351 million tonnes in 2014. This, they claim, has led producers to push steel into markets like India which are still growing at a fast clip.
Thus, China exported 93 million tonnes of steel in 2014, which was more or less the same as India's total production capacity, followed by Japan (41.3 million tonnes), South Korea (31.9 million tonnes), Russia (27 million tonnes) and Ukraine (21 million tonnes). Together, these countries account for 82 per cent of the surplus global steel capacity.
Seeking protection
To be sure, India is not alone when it comes to protecting local steel makers: globally, there have been more than half a dozen cases of countries taking action against cheap imports in the last few months. The United States, Canada, Mexico, Australia and the European Union have initiated anti-dumping proceedings against a host of countries across products. (Some of these cases include India.) Malaysia initiated safeguards on imported hot-rolled coils last week.
There is no denying that there has been a surge in steel imports into India over the past year. What has made matters worse is that the rupee has depreciated less, vis-à-vis the dollar, as compared to the currencies of China, Japan, South Korea, Russia and Brazil.
According to the steel makers, 162,000 tonnes of hot-rolled coils (the product category on which the recent safeguard duty has been imposed) were imported in September last year at an average price of $584 a tonne. In August, 410,000 tonnes got imported at $405. Thus, while import volumes more than doubled, prices fell a quarter.
Some steel makers insist that Brazilian hot-rolled coils have been imported at as low as $330 a tonne - a price no Indian steel maker can hope to match.
As a result, hot-rolled coil prices in India fell from Rs 33,500 a tonne (ex-factory) in September last year to Rs 27,000 now, a decline of almost 20 per cent. The three petitioners say that, thanks to cheap imports, they reported a combined loss of Rs 1,000 crore in the June-ended quarter.
Though some commentators have pointed out that steel companies are highly leveraged, which impacts their bottom-line, the loss prompted the steel makers to seek protection from the government. "If the Indian banks need to reduce their non-performing assets, this state of affairs (low-priced imports) couldn't have continued for long," says a steel industry source.
This, to be sure, was the fourth intervention by the government in the last few months to protect the domestic steel industry. In June, import duty on long products (used in construction) was raised 2.5 per cent and anti-dumping duty of up to $316 per tonne was put on stainless steel. This was followed by a 2.5 per cent increase in import duty on flat products in August.
After the safeguard duty, imports are expected to drop by about 60 per cent in select steel products. "Domestic producers are surely going to see volume gains in the coming months as imports will slide substantially due to the safeguard duty," says Giriraj Daga, senior analyst with SKS Capital & Research. The Directorate General of Safeguards in its notification had said the market share of imported steel had doubled to 12 per cent. "We will see the market share of domestic producers go up," says Daga.
India Ratings has said that the safeguard duty will make hot-rolled coils imported from China costlier by Rs 2,000 a tonne than domestic steel. "This will be in stark comparison to the present situation, wherein imported hot-rolled coils are cheaper by Rs 2,000 a tonne," it said in a report. According to India Ratings, this could improve capacity utilisation from 81 per cent in 2014-15, which would result in better fixed cost absorption and increase the EBITDA for Indian steel makers.
Some experts are of the view that steel was being imported in large quantities because prices had fallen steeply - it wasn't being "dumped" at unreasonably low prices. This has happened because global iron ore prices have declined 58 per cent since September 2013 to the current level of $57 per tonne. In India too, state-owned NMDC has pared prices of iron ore lumps by a third and iron ore fines by nearly a half. This ought to have helped domestic steel makers cope with lower steel prices.
"This correction in global iron ore prices cannot be used as the rationale for introducing restrictive duties on imports as the domestic industry has benefited in the past for a long period due to strong global iron ore prices," says a report by brokerage house Prabhudas Lilladher.
The downstream users are, of course, not amused. Indian automobile makers import steel in small quantities, mostly of grades that are not produced in India. An industry source says domestic steel companies price their products just below the import price. Since the price of imported steel will go up, domestic companies will also increase their prices. The automobile companies can pass on these higher input costs only if the market is buoyant.
Anupam Shah, chairman of the Engineering Export Promotion Council of India, told Mint that the safeguard duty will hurt small engineering exporters as it increases input costs for them and makes import of finished engineering products from China cheaper, which will erode their competitiveness.
HOW THE DUTY WILL HELP
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It will bring down imports by 60%
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Improve margins for steel companies in the second half of the year
- Provide pricing power to domestic steel producers
