Steel safeguard duty to improve domestic cos' profits: Moody's

Moody's today said the 20% safeguard duty on some variants of steel imports is credit positive for domestic producers and will improve their profitability.

"The imposition of a safeguard duty on certain categories of hot-rolled coil steel imported into the country is credit positive for Indian steel producers because the duty will support domestic steel prices, improve producers' profitability and their leverage metrics," Moody's Investors Service said in a report.

"For our rated entities in India, Tata Steel (Ba1 stable) and JSW Steel (Ba1 stable), the safeguard duty is credit positive as it staves off some of the downward pressure on their realisations caused by cheap imports."
 

The safeguard duty and a depreciating rupee will provide a stabilising impact on domestic prices and demand-supply equations, it said.

The 20% duty - which was announced on September 14 - took effect immediately and will be levied for 200 days.

The levy will be applicable uniformly to the aforesaid category of steel imported from all countries, even the ones with whom India has an FTA (free trade agreement).

Surging imports - especially from China, South Korea and Japan - have resulted in an imbalance between the supply and demand of steel in India and led to a sharp drop in prices.

Domestic prices fell 25% between June 2014 and June 2015 owing to a 57% increase in cheaper imports, one third of which came from China, Moody's said.

"The safeguard duty and a depreciating rupee will provide a stabilising impact on domestic prices and demand-supply equations although the extent of price increase may vary and fall short of the duty imposed," Moody's said.

The rupee depreciated 6% to 63.6 against the US dollar at June-end of 2015, from 60.06 a year ago, and by a further 4% to 66.4 as of September 15, 2015.

The weak rupee makes steel imports more expensive and therefore, helps domestic steel producers indirectly, it added.