Budget recommendations from the Indian Stainless Steel Industry

India Infoline News Service | Mumbai | January 20, 2016 16:39 IST

Based on expectations of 7-8% economic growth, the Indian stainless steel industry has made substantial investments towards capacity expansion and modernization. However, these investments now stand in great jeopardy because of the surge in imports, especially from China.

Like other manufacturing sector in India, stainless steel industry has also been facing extreme difficulty in the last few years.  Based on expectations of 7-8% economic growth, the Indian stainless steel industry has made substantial investments towards capacity expansion and modernization. However, these investments now stand in great jeopardy because of the surge in imports, especially from China.  
 
Imports of stainless steel flat products have risen from 324,460 MT in 2013-14 to the highest ever record of 459,164 MT in 2014-15 (Source: Ministry of Commerce) registering 41% growth.
 
Imports from China have more than doubled from 111,764 MT in 2011-12 to 231,602 MT in 2014-15 (Source: Ministry of Commerce). China now accounts for more than 50% of the import basket. This is the single largest threat for the industry today.
 
This has led to the domestic stainless steel industry having low capacity utilisation of less than 50%.
 
The import surge from China can be attributed to the following factors:
 
Excess capacity and surplus production in China 
 
From being a net importer of Stainless Steel in 2009, today China is the world’s biggest exporter of Stainless Steel. There is huge surplus production of Stainless Steel in China which is being diverted to growing markets like India.
 
Currently there is 63% capacity Utilisation in China.  One can only gauge the situation when China starts using its capacity to the fullest. 
 
Even when such surplus capacity does exist, China still envisages increasing its steel melting capacity by another 6 million tons and Cold Rolling capacity by another 3 million tons over the next two years ( Source : CRU International).
 
With the distinct economic slowdown in China with a severe contraction in local industrial demand, it can be concluded that China would export their surplus production to growing markets like India. 
 
2.  Duty disparity
 
There exists a favourable fiscal policy in China which combines high rates of import duty on finished goods with virtually NIL duties on raw materials. This ensures that Chinese Stainless Steel manufacturers simultaneously enjoy the benefits of cost advantage on inputs and tariff protection from imports on output. This policy of the Chinese Government of providing dual protection to the local Stainless Steel Industry has completely skewed the rules of competition in favour of the Chinese manufacturers.  A comparison of the import duty structure between India and China clearly brings out the stark difference between the two:
China India
Finished Goods
Stainless Steel Flat Products 10% 7.5%
Raw Materials
Steel Scrap NIL 2.5%
Stainless Steel Scrap NIL 2.5%
Ferro Nickel 1% 2.5%
Ferro Molybdenum 2% 5%
Pure Nickel NIL 2.5%
Ferro Chrome 1% 5%
 
Even other countries like Brazil, Indonesia, Thailand and Vietnam have higher duties on Stainless Steel Flat Products e.g. Brazil has 14% import duty and ASEAN countries like Indonesia, Thailand & Vietnam have 10% import duty.
 
Further, even carbon steel flat products & other alloy steel flat products in India enjoy the benefit of 12.5% duty (there were two consecutive duty hikes of 2.5% each in the months of June’2015 & August ’2015). Considering the fact that imports occupy 45% -50% market share, there is a crying need for increasing the import duty on Stainless Steel Flat Products.
 
Added to this, China also imposes export duty on critical stainless steel raw materials as tabulated below: 
Raw materials Export duty in China
Stainless steel scrap 40%
Mild Steel scrap 40%
Coking Coal 10%
Pure Nickel 15%
Ferro Nickel 20%
Ferro Chrome 20%
Slabs and ingots 15%
 
These export duties have the effect of discouraging exports of raw materials from China resulting in artificially lowered prices in Chinese markets.
 
Since the Domestic Stainless Steel Industry is heavily dependent on imports for meeting its raw material requirements, the very inception of cost disadvantage lies in a distorted and discriminatory duty structure on inputs.
 
3.Other cost advantages enjoyed by Chinese Stainless Steel manufacturers over their Indian counterparts:
 
Availability of large Coking Coal deposits in China have ensured that local Coking Coal prices are significantly lower as compared to other countries.  This in turn results in lower Ferro chrome costs for Chinese manufacturers.  As opposed to this, India is completely dependent on imports for meeting its Coking Coal requirements.

Borrowing cost in China at around 4-5% is far lower, as compared to India where it is in the region of 12-13%.

The Chinese currency has been relatively stable against the US Dollar and therefore Chinese manufacturers do not have to incur any hedging cost.  However, the volatility of the Indian rupee against other currencies has increased the hedging cost for the domestic Stainless Steel Industry (currently in the region of 8% p.a). Considering the overwhelming share of raw material to overall cost (around 70-75%) and dependence on imported raw material, it is only too obvious that that the competitive edge of the Domestic Stainless Steel industry has been completely blunted. 
 
Power cost in China is at least 30% lower as compared to India.  This is so because the power prices are kept at an artificially low level because of Government controls on fixation of power tariffs.
 
The Government of India has from time to time imposed certain measures to curb unfair trade practices of overseas players. These measures were aimed at creating a level playing field, but they have been ineffective as can been in the import data trend above.
 
Although, anti-dumping duty was imposed on imports of Cold Rolled Flat Products of Stainless Steel in widths of 600mm-1250mm from Korea, China, EU, Taiwan, South Africa, USA & Thailand however, this anti-dumping duty proved to be completely ineffective due widespread circumvention of duty. It was easy to import higher widths (widths > 1250mm) and slit the same into narrower widths before final application at a very nominal cost. The cost of slitting and scrap generation was extremely insignificant as compared to the average incidence of Anti-Dumping Duties levied.
 
The contention of circumvention is well borne out by the fact that there was a complete change in the pattern of imports after the imposition of duty as evident from the final findings of the DGAD, Ministry of Commerce report dated 12th October, 2015. DGAD Final findings have pointed out circumvention of this duty, virtually making the duty ineffective. Therefore, Govt. must initiate the investigation in anti circumvention petition (on width >1250 mm) at the earliest to check this unwarranted imports.
 
INCREASE IN BASIC CUSTOMS DUTY ON STAINLESS STEEL FLAT PRODUCTS & REDUCING DUTY ON CRUCIAL INPUT
 
In order to protect and revive the domestic ailing stainless steel sector govt. must enhance basic customs duty on Stainless Steel Flat products from the existing level of 7.5% to 15% in the budget. While the duty on all other forms of steel (carbon steel, alloy steel and stainless steel long products) was increased by 5% in two tranches of 2.5% ( in June’2015 & August’2015), stainless steel was completely kept out . This is extremely strange considering the fact that imports currently account for 45% market share in the organized sector in stainless steel whereas the share of imports in other segments is in the region of 10-12%.
 
There is a crying need to enhance the import duty from 7.5% to 15% on Stainless Steel Flat Product. The advantage of such a measure is that basic custom duty cannot be circumvented in any way whatsoever. Further, given the competitive disadvantages being faced by Indian manufacturers (as outlined in the preceding paragraphs), a duty increase will help to create parity and promote free and fair competition.
 
The duty on critical raw materials like Pure Nickel, Ferro Nickel, SS Scrap and MS Scrap also needs to be reduced to NIL from the existing level of 2.5% in order to create a level playing field with China and other countries. 
 

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