CBAM: An opportunity for generating higher revenue from Indian steel export through market diversification

Ever since the European Union (EU) notified the Carbon Border Adjustment Mechanism (CBAM) in mid-2023, the Indian steel industry has been proactively examining ways to meet the challenges expected to arise from the same. This border tax is a tariff on carbon-intensive products groups like iron and steel, electricity, aluminium, cement, fertilisers and hydrogen imported into the EU. From 1 January, 2026 the EU will start collecting this carbon tax on each consignment of steel items.

Official data shows that flat-rolled products (hot- rolled and cold-rolled), with a major share in the steel export basket, are the principal export products from India. India exports different HR products to more than 100 countries across the world. Nonetheless, only 5 EU countries, namely Italy, Belgium, Spain, Greece and Poland, accounted for 25% share of its HR exports during financial year 2022-23 (FY'23). This high level of market concentration would have a distortionary effect of CBAM on Indian steel-makers if they do not diversify their export destinations.

India is presently known as one of the most important players in the global economic landscape, pursuing negotiations with many untapped markets in Africa, Latin America and the Middle East. The Government of India, along with the domestic steel industry, will soon introduce "Made-in-India" branded steel products to the world market, giving scope to Indian steel-makers to expand their businesses abroad.

Under this favourable situation, some small but less stringent countries like Benin, Congo, Egypt, Mexico, Qatar, Somalia, Turkiye and the United Arab Emirates were found to be potential markets for reducing the CBAM shock for Indian steel exporters. In FY'23, India exported different HR products, albeit in low volumes (13,617 tonnes) to these countries at an average price of INR 76,700/t whereas it exported the same products in higher volumes (91,411 t) at a price of INR 66,695/t to the EU countries (Table-1). The Indian steel sector could have advantageously generated an additional revenue of around INR 91 crore from exporting the select HR products to the cited countries in Africa, Latin America and Middle East in lieu of the EU countries when an upward trend of the Indian Rupee depreciation was observed.

The Harmonised System (HS) of global trade is a standard numerical method for classifying traded products.

Free on Board or the FoB price of an item is set by factoring its production cost, profit, domestic transport costs, costs incurred in placing the item in the ship for export, storage and warehousing, port handling, brokerage fees, service charges etc.

The high GDP growth (Table 2) in most of the small potential countries amidst the macro-economic challenges in 2022 and China's strategy to curtail its crude steel production (Table 3) showed the potentiality of Indian steel products that would capture the heart of the international market.