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Export duty levied on steel intermediaries, major steel products; import duty reduced on some key raw materials

ICICI Securities 23 May 2022

What’s Buzzing:

Export duty has been levied on steel intermediaries and on major steel products. Import duty on some raw materials used in the steel making process have also been reduced. This duty changes will be effective from May 22, 2022.

Context:

In order to improve availability of steel in domestic market, export duty has been levied on steel intermediaries and key steel products. Export duty of 15% (from nil earlier) has been levied on major steel products (including stainless steel). Key items on which export duty of 15% has been levied includes pig iron, flat-rolled products of iron or non-alloyed steel, bars and rods and various flat-rolled products of stainless steel, etc. In case of iron ore and concentrates, the duty has been raised to 50% on all categories, up from 30% (furthermore the 30% export duty was earlier applicable only for lumps that were above 58% iron content). In case of iron ore pellets, which currently does not attract export duty, a 45% duty has been imposed. To reduce the cost of domestic production of steel products, import duty on coking coal and anthracite has been reduced from 2.5% to zero while the same on coke and semi-coke has been brought down from 5% to zero. The import duty on ferronickel has been lowered from 2.5% to zero.

Our Perspective:

At a time when export markets are lucrative, the levy of hefty export duty on major steel products is a big blow for domestic steel companies. Along with export EBITDA/tonne, domestic EBITDA/tonne of steel companies is also likely to come under pressure over the short to medium term due to this development. On the back of Russia Ukraine conflict, there was a healthy uptick in global steel prices over the last few months. Exports had become a lucrative market for domestic players due to healthy realisations. For some steel companies, the EBITDA/tonne of exports sales were higher than the domestic EBITDA/tonne. However, the recent step to levy export duty on various steel products would lead to reasonable quantum of volumes to be shifted to the domestic markets. Also, accessing the current lucrative global export would come at a cost. Higher volumes pushed in the domestic market would also put downward pressure on domestic steel prices and thereby even lead to a fall in domestic EBITDA/tonne. This development comes at a time when we are approaching a seasonally weak quarter (monsoon quarter i.e. Q2) wherein domestic demand is already soft. The import duty on key steel making raw material such as coking coal has also been reduced to nil from 2.5% earlier. However, on a net effect, the negatives on account of levy of export duty of 15% on some of the key steel products exceeds the small benefit of cut in import duty of coking coal.

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