Sushim Banerjee
Last week was eventful in more than one way. Chinese devaluation of yuan initially by around 2% and increasing to more than 3.4% in the following days, enhancement of customs duties on steel (except SS flats and CRGO sheets) by 2.5%, rupee depreciation by around R1.3 or by 2% and IIP indices for June ’15 showing 3.8% growth with 4.6% rise in manufacturing were the major events. The Bank of China describes the devaluation as market-determined, but allays apprehension of a continuous devaluation up to 10% as widely believed to be the currency manipulative action.
Assuming 3.5% depreciation the current Chinese export prices to India comes to $314 CFR/t. The landed cost goes up to $345/t or around R22,500/t on account of duty rise. Including these entire plus and minus factors, the net differential between Chinese export offers and average prices of Indian HRC comes to around $77/t or R5,013/ tonne, which is substantial.
There are already reports of further price depression by Chinese mills to enhance its competitiveness in the global market. The yuan devaluation is a conscious decision by Bank of China to promote falling exports of steel and other manufactured items containing steel like pre-fabricated structural components while indirectly it signals relative strength of dollar. This implied interpretation on strength of dollar may have led to marginal depreciation of rupee recently although the US has made it clear that there is no plan to hike interest rate in the domestic market.
Total steel exports by China in January-July 2015 stood at 62.1 MT, 6.6% more than the previous year while imports are down by more than 9%. On annualised basis the estimated direct steel exports stand at record level of around 110 MT in 2015. The yuan devaluation may lead to hike in import price of iron ore by China and may result in higher coke exports by that country.
The net losses in Q1 by JSW, SAIL, JSPL and lower net profits by Tata Steel and Essar Steel indicate lower sales realisation and lower market share by indigenous steel producers. Cheaper import flows from China and Russia and from Korea and Japan at concessional duties under RCEP have been cited as the singular reason. It is seen that while total steel imports at nearly 4 MT during the 4 months of the current fiscal rose by 67% (JPC report), those from China has gone up by 41% and the cumulative imports from Russia, Korea and Japan went up by more than 90%.
The share of imports in total finished steel consumption which is growing by 5.4% over last year stands at 14% (from the average 9-11% in last few years). During the last 4 months the imports of HRC reached a record level of 1.4 MT, more than double compared to last year. Likewise more than 0.5 MT imports of wire rods and TMT are depriving the domestic manufacturers to enhance market share and realisation.
One relief for the flat producers triggered off by the latest Chinese move relates to the supposed relook by the US at the provisions of Trans-Pacific-Partnership (TPP) with China and a few other countries where surplus steel capacities may be instrumental in pushing ahead with cheap exports. This includes the concern of Indian steel producers also. Apart from customs duty hike, the government must envisage imposition of safeguard duty as an interim measure to thwart massive steel import inflows. Specific steel categories, if not steel as a whole, must be taken out of consideration while negotiating for CEPA/FTAs with China and other countries.
The author is DG, Institute of Steel Growth and Development. Views expressed are personal.
Source: Financial Express
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