India's sudden and unexpected revision of export duties on steel products is likely to result in short-term uncertainty and long-term structural ramifications on global steel markets, sources told S&P Global Commodity Insights May 23.
Effective May 22, India hiked export duties on several products covering iron ore and steel, the Ministry of Finance said.
Market participants, however, noted that boron-added hot-rolled coil, HS Code 7225, could still be exported, even though the official notification has yet to be published on the gazette. According to sources, this could have been either deliberate on the part of the government or was missed out given that boron-added HRC has not been exported recently.
"I think Indian mills will take some time to ensure they can supply boron (or other alloy) added HRC, as alloy added may cause edge cracks of the coils," a Shanghai-based trader said. "Some Chinese mills are still unable to control the quality of alloy added HRC."
The export duties will be applicable even for countries with whom India has free trade agreements with, sources said.
Domestic demand to prop up
Following the ministry's announcement, several end-users told S&P Global the revisions were positive, in anticipation that India's steel-intensive exports, including the manufacture of goods, pipes and auto-components, will rise. The announcement was made with an eye on the 2024 national elections, since a staggering increase in steel input costs since 2020 left several infrastructure projects unviable, the increase in real estate and automobile prices as well as heightening inflation, sources said.
"The objective of the government is to curb inflation and not to stop steel exports," a Mumbai-based exporter said. "As they get lot of foreign exchange revenue from steel exports."
Platts assessed domestic HRC delivered Mumbai at Rupees 69,000/mt at the Asian close May 20, 76.9% higher from Rupees 39,000/mt ($502) on Feb. 5, 2020, data by S&P Global showed. In contrast, Platts had assessed Chinese HRC ex-stock Shanghai 34.8% higher from Yuan 3,590/mt on Feb. 5, 2020 to Yuan 4,840/mt on May 20. With this revision, market sources unanimously expect domestic prices to fall substantially.
"It will be interesting to see OEMs' [original equipment manufacturer] behavior towards steel mills," a north India-based OEM supplier said. "Even the April price increase given the current situation will not be easy for OEM's to tap. Steel mills may try to negotiate for half yearly agreement with a small increase or may roll over."
Bearish views on exports, regional markets affected
The move will accelerate a decline in exports after fiscal year 2021-22 (April-March), when India's overall exports spiked 29.1% annually to 10.78 million mt, supported by demand from Europe and the Middle East, especially for hot-rolled coil. Regional HRC prices in the Middle East and Europe are likely to rise, even as Vietnam may completely depend on Chinese cargoes as Indian supply gets curbed substantially, sources said.
"Indian rebar is already struggling against Turkish prices. With this, it seems no chance to export," a Telangana-based exporter said. "As of now, I don't think domestic market will provide any relief."
Prior to the export duty hike, India's steel exports sank 21.9% year on year and 37.8% month on month to 0.74 million mt in April as global demand fell. With domestic demand still sluggish since April, and likely to stay muted until the end of the monsoon season in September, a glut in the domestic market is probable, pushing prices down strongly. Platts assessed IS1786 Fe500D/Fe550D 12-25 mm diameter rebar delivered to Raipur at Rupees 57,900/mt on May 20, falling 7.65% from Rupee 62,700/mt on April 1, data by S&P Global showed, highlighting the market weakness.
Production cuts imminent
The Indian market remained certain that steel mills could reduce their production, at least in the short term, since domestic consumption would not be able to match high capacity utilization rates.
"If domestic mills are not able to vent out their stocks via export and if they have to equate additional reduction in offer prices by 10%-15% in order to compete in international markets, they are left with two options," a Mumbai-based distributor said. "Either dump all inventory in government projects/consumers/trade market or cut down production."
The U-turn in the government's policy framework, whereby India could cater to the world's steel demand through value-added exports to complete exodus is being seen as "regressive".
"(The steel) Industry exported nearly 10% of production last year. Probably 10% production will have to be cut in the short term," a Mumbai-based mill source said. "Also, this policy severely hampers India's image as a stable policy country. Long-term international customers of India will have to go back to countries like China to de-risk."
According to a New Delhi-based source, the tariff revision was due to domestic mills' inability to offer special preferential pricing to micro, small and medium enterprises, which has made it difficult for such businesses to survive. The announcement was also in support of small secondary steel mills, struggling with sourcing and reasonable iron ore prices.
"The announcements increase domestic iron availability and put downward pressure on iron ore prices as demand from the pellets industry will also decline," he added. "So, it benefits the secondary steel producers, who hardly export."
A second New Delhi-based mill source questioned how Indian steel mills could fulfill their export obligations under the Export Promotion Capital Goods license scheme, which allows the import of capital goods at 3% customs duty subject to the condition that an export obligation of eight times the duty saved is to be fulfilled within eight years of authorization issue date.
"Export duty over a range of steel products will have a chain of economic consequences and is likely to affect new investments in steel capacity creation and also the Atmanirbhar Bharat Abhiyan for Steel," the Indian Steel Association tweeted. " As steel exports valued at $23 billion in 2021-22 in jeopardy, we request the government to review imposition of export duty."
Source: S&P Platts