Strike one to the domestic steel industry. The director general (safeguards) has recommended a 20% safeguard duty on imports of flat steel, with a width of 600mm and above, based on a preliminary investigation. The duty will last for 200 days, even as a final enquiry into the dumping allegations proceeds. The duty will be effective if the government accepts these recommendations.
This should be good news for flat steel producers, if it translates to higher domestic prices. Between April and now, Joint Plant Committee data shows a 58.2% increase in total steel imports (both flat and long steel products) and the price of flat steel (2mm thickness) in Mumbai has declined by 15% as of 15 July.
Is this safeguard duty a magic cure for all that ails the steel industry? First, the government needs to accept the recommendation. If it does so, it will hike the landed cost of imported flat steel, but it will also increase input costs for buyers of these products. Flat steel is used in various industries such as cars and consumer durables.
These producers will pass on these costs to their buyers, and the eventual burden will be borne by the consumer. The government’s decision should be guided by whether the benefits of the safeguard duty outweigh the costs.
A Bank of America Merrill Lynch report states JSW Steel Ltd and Steel Authority of India Ltd to be the main beneficiaries if the duty is imposed. These were also two of the three complainants in the case, with Essar Steel India Ltd being the third. But this anti-dumping duty will work only if the basic import price remains constant. If exporters to India lower their prices to offset the safeguard duty, it could cancel out the benefits.
A Credit Suisse report on the subject takes the view that the duty will not solve the balance sheet stress of debt-laden steel companies. It cites the post-duty price of hot-rolled steel at $455 per tonne, which would still be lower than the average of $462 in the June quarter and $550 in FY15.
But this safeguard duty may let the premium between domestic and imported steel continue. An IDFC Securities research note talks about how the premium has touched 24%, rising well above the 10-year average of 9%. The report, which predated the safeguard duty action, said it expects prices to fall except if a safeguard duty was imposed. That implies that domestic prices could get some support from the duty.
Steel prices are falling globally and India is one of the few large markets where demand is growing. It is natural for exports to make a beeline for the country, especially when domestic prices are trading at a premium to imported steel.
Catching a falling knife is never easy. This one is no different. If global steel prices decline further, then the steel industry may not benefit from the duty. That may hurt sentiment further. If domestic producers cut back on purchases because of higher costs, it could prove counterproductive. How market forces react to this duty may be another story altogether.
source: Live Mint