Duty cut: Too little, too late for steel players

Domestic prices will still be at premium to imported steel thus providing limited respite

The government's decision to increase basic Customs duty on steel imports by 2.5 percentage points, though welcome, is not adequate to provide respite. Imports will still be expensive. The domestic prices have already plummeted Rs 33,000 a tonne in May, from Rs 41,000 a tonne in August last year. The front-line stocks such as Tata Steel and Steel Authority of India (SAIL), integrated players, continued to trade in the red, while JSW Steel (non-integrated player) will still see better operating performance due to lower raw material costs. Its stock gained 2.75 per cent.

The government has hiked basic Customs duty on flat steel products from 7.5 per cent to 10.0 per cent and on long products from 5.0 per cent to 7.5 per cent. The decision is sentimentally positive for Indian players facing challenges on demand and realisations, impacted by cheaper imports. In FY15, India imported 9.3 million tonne (mt) of finished steel, higher by 71.1 per cent y-o-y. During April-May, steel imports grew 54.5 per cent over a year to 1.67 mt, according to ICICI Securities data.

  The industry thereby has been demanding some action for some time now to curb imports. While it will find some solace in the duty hike, domestic steel prices still are higher than imported one.

Analysts at Edelweiss say the hike is unlikely to aid steel price increase, as current domestic flat product prices are already at a premium of about Rs 3,000 a tonne, compared to imported steel. Similarly, the premium on long products is Rs 2,000 a tonne. The hike will narrow the premium by about Rs 600 a tonne but analysts expect imports to continue unabated.

Besides premium, the fact the imports are coming not only from China but from Japan, Korea and countries under free- trade agreement with India. The imports from these countries may not get impacted by the duty hike, given the incentives. Taking an example of Japan, analysts at Kotak Institutional equities say, "The effective import duty on steel from Japan has been reduced to mere 0.8 per cent from April under FTAs (compared to 1.7 per cent in FY15) and this will not change due to this duty hike.

What's more, some analysts as Goutam Chakraborty at Emkay Global believe had the hikes come earlier the fall in steel prices may have been not been as sharp as we have seen. Though, the decision is sentimentally positive but it's too little and too late.