Indian govt may not consider export tax rollback till Dec'22 amid demand expectations, inflation fears

• Levy roll-back 'at this stage may aggravate steel prices'
  
  
• Additional demand of 3.5 mnt expected in Q3 amid infra push
  
  
• Levy on stainless steel, however, may be roll back
  
  
• Indian steel composite price index up w-o-w after a while
  
  

Morning Brief: The government feels the much-talked-about 15% export duty on finished steel and intermediaries should stay till the end of the third quarter (October-December, 2022) of the current financial year of 2022-23 as a roll-back may "aggravate steel prices." The duty had been imposed from 22 May, with the intention to ease inflationary pressures.

"Prices had initially eased but have now flattened and stabilized and the rate of decline has moderated," a steel ministry presentation said. The initial reduction in prices was 9-14% by 10 June, 2022 vis-a-vis 20 May, 2022. The decline vis-a-vis 20 May till 19 August was 5-17% against a 20-39% decline in the US and EU over these months, steel ministry data show. The decline from July has been 1-2%.

Stainless steel
At the same time, the government is mulling a complete removal of the export duty on stainless steel (SS). It may be mentioned that grades HS7222 and HS7219 are export-oriented, although they comprise a small fraction of the total SS production, at 4 lakh tonnes and 8 lakh tonnes respectively. Around 80% of HS7222 production and 42% of HS7219 are exported. Therefore, the ministry recommends, "Export duty on HS7222 and HS7219 may be considered for removal."

Total SS production in CY2021 was 2.71 mnt and in January-July, 2022 at 1.53 mnt, as per SteelMint data.

The latest government decision to retain the export tax on steel is, however, based on certain expectations:

Additional demand: The government is expecting an additional 3.5 million tonnes (mnt) of steel demand in this quarter y-o-y on account of the INR 10 lakh crore infrastructure push.

"If domestic demand is good enough then it would compensate for the loss incurred in exports. There will be no need for exports," suggested a source.

A source said, as per the numbers being worked out by the WSA and ISA, steel demand in Q1 (April-June, 2022) was 26 mnt and is expected to touch 27 mnt in Q2, 28 mnt each in Q2 and Q3 and 30 mnt in Q4. But, of course, in reality, these numbers can be higher, depending on how situations unfold.

Seasonal support: The government is expecting steel demand to increase in Q3, it being a "good" period for construction activities. "Demand will increase towards the end of the monsoon. The present commodity price fall is encouraging buyers to lock into a price decision. So, buying will see traction in the coming quarters," a source said, adding that he expects demand to grow 6-7% in the coming quarters, unless there is any unforeseen shock.

Cost push factor: The government also feels that prices of key raw materials like coking coal and iron ore will rise in Q3. Further, prices of coke are also expected to rise. Futures for coke for December 2022 are trading at a higher $275/t against the current $200/t levels.

Analysts SteelMint spoke to said, based on the production plans of some of the leading global iron ore and coal miners, prices of the former should move up by $10-20/t in the next six months and coal, by $20-40/t. Thus, raw material suppliers are also expecting a steel demand improvement in the next six months and thus, there will be a cost push.

Lower supply to support price rally: The government, on its part, also listed factors that may put pressure on prices:

International supply during the current year is likely to be lower than in the previous year.
Global production during April-June, 2022 was at 950 mnt, 5.5% lower than CPLY.

Govt stand
"Rolling back export duties at this stage may aggravate steel prices. The duty roll-back may give unintended signals to the market to prefer exports over domestic demand," highlighted the steel ministry presentation.

"In view of this, reduction in duty may be considered after stabilization of the volatile market conditions, and cooling of inflationary pressures and steel price trends in the next quarter," the presentation added.

Steel composite index inches up
Meanwhile, the SteelMint India Steel Composite Index edged up 0.6% to 151.80 points for the week ending 16 September, 2022. Longs moved up 0.52% and flats by 0.95%. Importantly, the flats index has rebounded for the first time since mid-April, 2022.

The recent uptick in flats shows that, indeed, prices have bottomed out and the market is bracing for the upcoming "demand" season. Demand for cars and white goods increases in India during the festive season, which will fuel flats demand. Demand from other sectors too, like agriculture etc, starts pulling up in October onwards.

Longs will of course see heightened action as construction picks up as the rains recede.

Mills need not be under too much pressure if domestic demand can compensate for the loss in terms of exports.

The India Steel Composite Index
The India Steel Composite Index is assessed on a weekly basis: every Friday at 18:30 IST, as per the weighted average prices based on manufacturing capacity and production.

SteelMint considers the Composite Index with the base year being 3 January 2020 (financial year 2019-2020) and the base value as 100. The Composite Index does not give the absolute price but a trend of the market. The Indian steel industry is broadly classified into the BF-BOF and the electric/induction furnace routes. Keeping this broad classification in view, SteelMint proposes to release the Composite Index by considering both production routes by manufacturing capacity and the production weighted method to compute the index for India. For details click to view the methodology document.