Indian infrastructure companies do not expect the government's move to increase export duty on steel, in an attempt to reduce the alloy's domestic price, to have an immediate effect on the cost of infra projects or the speed at which they are awarded, senior company executives said.
The industry expects steel prices to soften only over the next few quarters, which may subsequently reflect in the cost of projects.
“Steel prices are currently at an all-time high and while the move by the government will help in softening steel prices over the next quarter or two, it is not expected to spur an immediate rise in (the speed of) awarding infrastructure projects in the country,” said RK Pandey, member- projects, National Highways Authority of India (NHAI).
On May 21, the government announced that export tariffs on new iron ores and concentrates would be raised to 50% from 30%, and duties on pellets would be increased to 45% from zero. The government also removed import tariffs on coking coal and coke. Iron ore and steel prices hit a record this month on concerns of supply shortage.
While developers are expected to benefit from the falling price of steel, projects that are already in the execution stage will not see the benefit of a full pass-through of \the decline, said Pandey.
“While most projects have a cost pass-through clause in their contracts, the quantum of falling steel prices may not be passed through completely in projects,” Pandey added.
An executive from IRB Infrastructure Developers added that bridge construction projects will be the major beneficiary of the government’s move because steel makes up around 15 percent of the costs in bridge construction.
The Federation of Indian Export Organisations (FIEO) said these measures will bring down domestic prices of key inputs and soften inflation. This will also add to the competitiveness of the manufacturing and export sectors and will push value-added exports from the country.
Infrastructure company executives ruled out any immediate impact on the award of infrastructure projects in the country.
“Project awards are linked to many other factors and not commodity prices; they are linked with the ability of companies to monetise assets and raise funds. Project awarding goes through cycles and a fall in commodity prices is not expected to spur project awarding,” said Vinayak Chaterjee, chairman, national infrastructure committee, CII.
Monsoon Factor
Multiple analysts also said the upcoming monsoons is expected to dampen the impact of the expected price cut. Typically, construction and engineering activity slows during the monsoon season and companies avoid building inventory.
“Demand from user industries for steel and cement typically comes down during the rainy season. Cutting prices with the monsoon season round-the-corner may not benefit infra and capital goods companies. Steel and cement constitute around 10-15 per cent of the cost of production for infra and construction companies,” Shravan Shah, said vice-president of research, and analyst, infrastructure and construction at securities firm Dolat Capital.
As a result of the government’s moves, steel product prices should fall by 10 percent for primary producers, Engineering Export Promotion Council (EEPC) India chairman Mahesh Desai said.
“Rising inflation has emerged as a major headache for policymakers the world over. Persistently high elevated prices pose a serious risk to demand and growth. The latest decision should partly neutralise the negative impact of surging raw material prices,” Desai added.
Primary steel product prices will fall by 10 percent for primary producers and 15 percent for secondary steel producers, Desai said. The engineering goods sector accounts for one-fourth of total merchandise exports and has repeatedly requested the government for liquidity support.
Some commodity traders and market experts expect steel prices to fall by around 20 percent in the next four to six months in the domestic market due to the higher export duty.
“With the imposition of the 15% export duty, the domestic price discount to international steel prices would be nullified and consequently, some of these sales volumes would be allocated to the domestic market. This would result in lower prices and thus margin compression. Alternatively, steel players may look to limit their output to maintain elevated price levels, which although is unlikely due to the negative impact of operating leverage,” India Ratings and Research said in a note.
Steel prices
Indian Steel Association’s secretary general Alok Sahay told Moneycontrol that the domestic market does not have the appetite to absorb the exported volumes in the short-to-medium terms.
The average monthly price of hot rolled coil (HRC)—a benchmark for flat steel—may have eased from Rs 76,000 per tonne in April but they remained elevated at about Rs 72,500 in May, compared with Rs 66,000 in May 2021 and Rs 35,900 in June 2020, when the COVID-19-induced lockdown was lifted, according to data by SteelMint, a provider of market intelligence for the industry.
“When consumer inflation has already been causing major worry, the all-time high prices of steel, cement and other building materials had attracted the PMO’s attention some time ago since they were increasing the cost of infrastructure creation in the country. While the government was not keen on tinkering with export duties, the situation could not have been let to deteriorate further,” said a senior official at Niti Aayog, the government's policy think tank.
The Indian Steel Association said steel export duty may result in India losing opportunities after the Covid-led disruption of the previous years.
“Imposition of export duty on steel will only send a negative signal to investors in the steel sector and will adversely impact the sector’s capacity utilisation. Besides, it may have a major impact on the entire supply chain in the long term,” it said
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