Iron & Steel and Aluminum exports to the US constitute only 0.29% of India’s total exports.
President Donald Trump announced recently that stiff tariffs will be implemented on steel and aluminum imports into the US.
The policy development by the Trump administration remains an idiosyncratic risk. Calls to impose steep tariff on metal products seem to be another instance of what become a trade war going ahead. While markets are edgy and fearful of a situation similar to 2002-03 when equity markets plunged, careful analysis does not suggest any derailment in the revival of the steel and aluminum industry.
Higher tariffs can potentially support improvement in capacity utilisation for the US industry.
Import tariff to improvise US capacity utilisation
As per US President Donald Trump’s statement, an import tariff would be levied for steel products (import tariff of 25%) and Aluminum (10%). While the decision is expected to be finalised this week, this is expected to improve capacity utilization for US-based companies in the metal space.
Chart: Capacity utilization of US Iron & Steel companies
US Iron and steel companies are operating at 74% capacity utilization, up from 64% from Oct 2016, but still behind the pre-recession operating efficiency. Case for aluminum industry is more striking where capacity utilisation is in the range of 39%-40% only. Steel imports to the US market is approximately 35% of the US demand wherein aluminum imports are more than 90% of domestic demand. Post tariff imposition, this situation is likely to change in favour of the US producers of metals.
Downstream industries of steel to face margin pressure
US downstream industry, particularly, car manufacturers would be impacted by this move due to higher burden of raw material prices. Interestingly, total vehicle sales seem to have peaked recently.
India: Only 2% of US imports
From the US perspective, imports from India don’t carry much weight and constitute only 2% of steel and aluminum imports to the US market.
Major markets that may be affected include Canada, Russia, UAE and China which comprise 73% of the total aluminum imports into the US. Similarly Canada, Brazil, Korea, Mexico and Russia comprise 57% of total steel imports to the US.
India: Exports have been the key driver for these commodities
Aluminium and steel (Iron & Steel) constitute 7.6% of India’s total export and if we include vehicles export (another potential segment for Trump’s trade war), it is 10.3%. Share of the US export in that commodity’s export from India varies but in aggregate (for metals) has 12% share.
Having said that exports to the US market in these categories (Iron & Steel and Aluminum) constitute only 0.29% of India’s total exports.
Surge in exports of metals
Exports have also aided revival of Indian domestic metal industry. Both Aluminum and Iron & Steel exports have surged more than 50% YoY (Apr-Dec’17). Protectionist measures as well as global demand revival and China’s supply side reforms have lifted fortunes of Indian steel players. Here, one also needs to take note that bulk of India production 72.3 mn tonnes (Apr-Dec’16) is utilised domestically (61.5 mn tonnes).
China supply reforms remains crucial
In case of both aluminum and steel industries, domestic capacity is ahead of current domestic demand. For instance, Aluminum domestic capacity is 4.1 MT but demand is about 3.3 MT making steady export market a need.
Interestingly, both China and Europe continue to face excess capacity and hence, Indian producers may face some challenge in finding a ready alternate market for exports. While China is pursuing supply-side reforms, point noteworthy is that imports of Iron & Steel and Aluminum from China still constitute about 17% of total imports in these categories. And imports of Iron and Steel, in value terms, have increased about 30% in last one year (Apr-Dec’17). Though much of the increase is due to pricing effect.
So a further traction in Chinese supply-side reforms remain a crucial factor for both Indian and Global steel and aluminum industry dynamics. Overall, in our view, in the overall global and Indian demand scenario, Trump tariff may dent a bit but may not derail the revival of the sector.Moneycontrol Research Page.