ICRA: Steel industry hit by a moving train as Government cracks the whip, imposes export duty to reign in elevated prices

24 May 2022 , 12:18 PM

On May 21, 2022, in an attempt to improve domestic steel availability and reign in steel prices, the Union Government imposed a 15% export duty on a range of finished steel products, which accounted for almost 95% of India’s overall finished steel exports in FY2021 and FY2022. In other steel categories, an export duty of 15% has also been levied on pig iron.

With domestic mills opportunistically tapping export markets, finished steel exports have so far accounted for ~10-11% of India’s finished steel production in the last two fiscals. However, the imposition of the 15% export duty would make exports significantly less attractive going forward, which in turn could exert pressure on domestic steel prices and industry capacity utilization levels. Interestingly, the Government has chosen to keep steel semis out of the ambit of export duties. Therefore, we believe that export of semis, which declined by 26% year-on-year (Y-o-Y) in FY2022 to 4.9 million tonnes (mt) is likely to witness a significant increase in the current fiscal.

Commenting on the industry trend, Mr. Jayanta Roy, Senior Vice-President & Group Head, Corporate Sector Ratings, ICRA said, “In FY2022, Indian mills recorded a 25% Y-o-Y growth in finished steel exports as they took the benefit of elevated seaborne prices. Europe, Vietnam and the Middle East were the three largest destinations for Indian steel exports, together accounting for around 50% of India’s overall steel exports, including semis.”

“We believe that many of these destinations would become less attractive now as mills evaluate the economics of a higher duty. Additionally, with steel export offers for deliveries to Europe being higher by 10-11% over more competitive markets like South-East Asia and the Middle East, the adverse impact of the new export duties on steel exports to Europe would be relatively less severe than that of South-East Asia and the Middle Eastern markets.”

On the raw material side, the Government has increased the export duty on 58% and above Fe grade iron ore fines and lumps from 30% to 50%. Though this is incrementally positive from the perspective of better availability of domestic iron ore, it may not be a material shock-absorber as it affects the economics of only less than 15% of total iron ore that was exported by domestic miners in FY2022.

Over 86% of the iron ore exported by miners in FY2022 was in the below 58% Fe grade category, which anyway has limited use in domestic steelmaking without further processing through beneficiation.

On the coal front, the Government has withdrawn the 5% and 2.5% import duties on coke and coal respectively, which is also marginally positive. However, adds Mr. Roy: “The impact of the imposition of a 45% export duty (from nil earlier) on iron ore pellets remain a major dampener for merchant pellet makers, which had exported 11.5 mt of pellets in FY2022 valued at around US$ 2 billion. With pellet exports accounting for around 15% of the domestic pellet production, industry asset utilisations are likely to be adversely impacted and domestic pellet prices could come under severe pressure going forward, putting at risk the expansion plans of several ongoing merchant pellet projects in the country. Also, in the last two years, many steel players enjoyed strong margins due to highly profitable pellet exports, which now appear unviable. Absence of pellet exports from their sales mix would in turn further pressurise operating margins in the near term.”

With various downstream industries trying to cope with the adverse impacts of runaway commodity prices, domestic steel demand declined by 7.2% month-on-month in April 2022. Channel checks suggest that steel demand has remained soft in May 2022 as well, leading to domestic hot-rolled-coil (HRC) prices contracting by 12% over the high watermark recorded in the first week of April 2022. Nonetheless, with domestic and imported coal prices continuing to remain elevated, leading to significant input cost inflation, and domestic demand remaining muted, the imposition of the export duty has come at an unpleasant time. ICRA’s analysis suggests that notwithstanding a modest decline in input costs due to a correction in iron ore prices and waiver of import duty on coal, the industry’s operating profits could see a downward correction of US$75-100/MT in the seasonally weak Q2 FY2023 compared to the current quarter.

With the domestic industry’s capacity utilisation levels crossing the 80% mark in FY2022 (83% average industry capacity utilisation in FY2022) after a gap of seven years, many steelmakers have announced large scale expansion plans accumulating to around 130 mt, to be implemented in the next one decade. Following the export duty levy, the pace of execution of some of these expansion projects could slow down as mill cash flows could weaken significantly going forward if the export duty is maintained over the medium term. However, supported by the aggressive deleveraging efforts demonstrated by the industry since FY2021, the industry’s credit metrics stand significantly better today, with the total debt to operating profits standing at an estimated 1 times in FY2022.