Anubhav Sahu Moneycontrol Research
We highlighted in our mid-July portfolio rejig note that there is a possibility for a removal of anti-dumping duty for the Phthalic Anhydride (PA) and last week Directorate General of Trade Remedies (DGTR) confirmed the same.
Consequentially, we expect competitive headwinds to increase for domestic phthalic anhydride majors - IG Petrochem and Thirumalai Chemicals. While these entities have been a key beneficiary of revival in end markets of PVC (Poly Vinyl Chloride) and pigments and continue to diversify towards value added products, their higher exposure to PA (80-95 percent) makes them vulnerable to potential pricing pressures.
DGTR has recently concluded its anti-dumping sunset review investigation concerning imports of PA from Korea, Taiwan and Israel (subject countries). In its closure report date September 13, 2018, DGTR has concluded that it is unlikely that dumping would continue or there is a recurrence of injury to domestic PA manufacturers if the anti-dumping duty is abolished. Therefore, it does not recommend continued imposition of anti-dumping duty. Having said that above order can be challenged at the Customs, Excise and Service Tax Appellate Tribunal
Phthalic Anhydride manufacturers’ contention Domestic Phthalic Anhydride manufacturers brought in following arguments while asking for continuation of anti-dumping duty.
Exports from the subject countries (Korea, Taiwan and Israel) can potentially increase as the anti-dumping duty is abolished. Currently, these countries have a surplus production of the order of 274,000 tonne (domestic consumption: 354,000 tonne) utilized for exports. Further, there is a surplus capacity of 154,150 tonne (44 percent of Indian consumption) which can be put to use as the opportunity arise. Further, domestic industry’s calculation suggest that potentially export volume increase from Korea alone can be 22 percent if the companies in Korea operate at similar capacity utilization as India.
Additionally, significant percentage of exports from Korea and Taiwan to other countries are at prices below the Indian prices. This means that such exports can possibly shift to India at similar prices. Currently, Korea and Taiwan exports about 40 percent of the volume to other countries at a discounted price of about ~5 percent.
Since significant imports of PA are already made at a price lower than domestic industry prices, so practically domestic industry would be forced to reduce product prices without anti-dumping protection.
DGTR view: No reasonable basis for continuation of anti-dumping duty DGTR contends that PA import price during the period of investigation was higher than cost of production of the domestic industry. Authority assess that domestic industry is not facing any continuation of injury on account of dumping or imports of PA.
Further, since the time of imposition of anti-dumping duty, production, sales and capacity utilization of domestic industry have increased significantly.
Additionally, after taking imports from major Korean importer (Aekyung) into account, one finds that 65 percent of India’s total imports took place without any anti-dumping duty during the period of investigation.
Our view While the domestic industry did not claim that there is a continuation of adverse impact on account of dumping, a potential for that was contested.
Anecdotal evidence suggests that as and when trade protection (safeguard duty and anti-dumping duties) have been revoked, imports from the subject countries have increased. DGTR gave a chronological reference for last 10 years when imposition and revoke of safeguard duties have accordingly impacted imports. Other major PA consuming nations like China and Pakistan have also seen the similar pattern in the past.
Though we acknowledge that a large part of import from the Korea has not attracted anti-dumping duty in the past, two factors suggest that pricing pressure can intensify in the new regime. Firstly, exports to other countries from the subject countries have been discounted, secondly in the last five years share of imports from the countries not covered under anti-dumping duty has increased from ~1 percent of demand to 11 percent. And hence next few quarters would be interesting as there is a potential for higher volume imports at a competitive prices.
Now, PA is a largely commodity chemical, where in 3-5 percent impact on product prices with everything constant can adversely impact the operating profit by 15-25 percent. Given this context, we continue to remain cautious on the domestic PA manufacturers.
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