Moneycontrol Pro Panorama | Where’s the import threat?

The gap between domestic and global prices can also make imports an attractive option.

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How things change. From a time when the government imposed an export duty on steel in a bid to protect domestic consumers, it’s now considering a countervailing duty on steel imports, according to a Mint news report. Both may seem unrelated but in some ways they are linked. When the government interferes in a free market and one with global linkages, where the finished product and raw materials are importable, it creates distortions that can hurt industry, investors and even steel consumers.

The commerce and steel ministries are in agreement on a countervailing duty, to the tune of 19 percent, with the finance ministry to take a final call, according to the news report. The main reason is that rising imports of steel are hurting domestic industry, particularly smaller steel producers. Two countries—China and Russia—are said to be a main source of worry, due to rising imports.

Does the data support this? Sure enough, steel imports in April rose by 7.2 percent over March and by 38.2 percent over a year ago. And, China’s share is up by 5 percentage points over a year ago. But exports have risen too, and India remained a net exporter of finished steel during April at 4 million tonnes. In FY23 too, India was a net exporter at 0.7 million tonnes and this was despite the steel export duty that was in place between May and November in 2022.

If net exports are positive, then do we have reason for a higher duty structure? The recent slide in steel prices, which looks like it could worsen, could be giving jitters to companies. While prices of raw materials such as iron ore and coking coal have been falling, global steel prices too have been declining. This puts pressure on domestic prices too.

A recent ICICI Securities report puts the 12-month decline in India’s export price at 30.6 percent and local prices at 11.4 percent, as of end-May. However, what really matters is the spread earned by steel producers and here, the report points out that the sharp decline in coking coal prices (down by 57 percent over a year ago) has led to improved spreads and it does not expect steel companies to be hit hard as a result.

The steel industry backdrop too has changed considerably in 2023. China’s economy is seeing the services sector in good form post-reopening, but the industrial side is facing some difficulty and the property market is not sending encouraging signals. That’s dampening the steel outlook and sending prices lower, not just of steel but even iron ore. But the real fear is that if China faces a situation of surplus steel output, then its mills will export and a flood of imports could depress prices in the region.

What’s more, India’s steel market is an oasis because of relatively high consumption demand. We recently pointed out that rating agencies expect the country’s steel demand in FY24 to grow by 7-9 percent in FY24, on the back of a robust 13.3 percent in the previous fiscal. That sort of demand growth in a year when the global economy may slow down will attract the attention of importers. The gap between domestic and global prices can also make imports an attractive option.

However, that India remains a net exporter of steel shows the market is still balanced in the industry’s favour, with the existing duty structure. Spreads also show the domestic industry has an upper hand, as of now. Later, if dumping becomes evident and domestic capacity remains unutilised, the case for counter-measures can become stronger. Otherwise, the wrong of imposing an export duty on steel cannot get corrected by imposing a countervailing duty in FY24.

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Ravi AnanthanarayananMoneycontrol Pro