India: How will the govt's new duty structure impact the steel, raw materials markets?

The Indian government announced steep tariffs on eight steel items as well as iron ore and pellets late on 21 May'22, which is likely to lead to a decline in domestic prices of steel and steelmaking raw materials, SteelMint understands.

The export tariff on hot- and cold-rolled alloy and non-alloy flat steel products, bars, angles and sections of carbon and stainless steel and flat products of stainless steel such as coils will now be 15%. Moreover, a hefty 50% export duty on iron ore irrespective of grade and 45% tariff on pellets exports will be levied.

Raw material prices to fall
The government has thus signalled its intention of curbing high retail inflation and controlling steel prices for domestic industries such as real estate, auto and cement. The immediate impact will be a decline in domestic prices of iron ore and pellets as exports have been rendered unviable and domestic supply will increase.

Over 15 mnt of iron ore and more than 11 mnt of pellets were exported by India in FY'22. China remained the top recipient accounting for around 80% of India's exports. Although Indian iron ore made up only around 3-4% of Chinese imports in CY'21, pellets from India accounted for 30% of China's total imports last year. Market sources believe the export tariff announcement will push the seaborne pellet premium higher.

Steel prices to drop
Higher supplies of iron ore and pellets for domestic producers will relieve the pressure and push prices lower. This will naturally cool down domestic steel prices that had jerked up after the Russia-Ukraine war before sliding from record-high levels.

A duty of 15% has been imposed on exports of steel items that make up for over 75% of India's steel exports. This will naturally disincentivise exports for domestic suppliers. Likewise, steelmakers' EBITDA levels are likely to be impacted as export margins to markets such as the EU are higher compared to domestic realisations. This is likely to affect domestic steel prices.

But, at the same time, production costs will also edge down as the 2.5% duty on coking coal has been removed. The sharp surge in coking coal prices was the key reason for the rise in steel prices.

Steel exports, both finished and semis, stood at 20.5 mnt in FY'22 - around 17% of the country's crude steel production fiscal.

Domestic demand to improve
Higher domestic supplies mean that steel prices are likely to fall from current levels. Domestic demand is expected to rise simultaneously with steel prices cooling off. For instance, stalled construction projects due to steep steel prices are likely to resume, thereby pushing up demand.

Semis exports to rise
As no export tariff will be levied on semi-finished steel, it may be assumed that exports of steel billets and slabs will rise from here on. India's presence in global semis trade is likely to increase because of disruption in supplies from Russia and Ukraine, both major exporters of semis. While Ukraine is likely to remain out of the market for some time, volumes offered by Russia have been low.

India's exports of semi-finished steel were around 5 mnt-5.5 mnt in FY'22. This may go up to even 8-10 mnt, SteelMint assumes.

Outlook
However, steel exports will continue to happen because domestic steel consumption is still lower than production. Ministry of Steel data show that while production of finished steel stood at nearly 112 mnt in CY'21, consumption was around 106 mnt. Again, steel majors that are leading exporters have supply obligations with customers around the world and so some exports will be inevitable.

In addition, efforts to tame inflation are likely to lead to the depreciation of the INR against the USD, which is likely to rein in prices further. Plus the excise duty cut on petrol and diesel will reduce the cost of logistics for steel companies.

Therefore, it can be assumed that despite the 15% duty, steel exports will continue to happen as the cost of production is expected to inch lower.

Sources in the country's secondary steel market informed SteelMint that ferrous scrap and billet prices have corrected downwards by INR 2,000-3,000/t since morning trade. Although the primary steel producers are trying to gauge the market now and haven't announced any cuts in prices, it can be expected that downward revisions are highly likely in the coming 7-10 days. Trades dried up today as the market is trying to come to terms with the new duty structure.

SteelMint understands that exporters will renegotiate contracts with clients, with the duty being imposed suddenly and cargoes already on water may not attract the new tariff. Further, the new duty structure could also be a temporary policy measure to control inflation. However, in the near term, prices and export volumes will drop.