India’s steel exports will drop 35-40% on-year to 10-12 million tonne this fiscal following the 15% export duty imposed on several finished steel products last month, a Crisil Research analysis shows.

Steel exports, which had reached a record high of ~18.3 million tonne last fiscal, continues to see momentum because of the disruption caused by the ongoing Russia-Ukraine conflict. For the record, Russia is a key exporter of steel, coking coal and pig iron. In addition, the European Union’s (EU) move to raise India’s export quota – amid a widening differential between steel prices in the two geographies – benefited domestic steel makers, and limited the impact of a 25% tariff on steel imports imposed by the EU.

But while steel firms enjoyed fat realisations overseas, domestic demand grew 11% on-year, driving domestic prices to all-time highs. This led to soaring construction costs and multiple price hikes by makers of automobiles, consumer appliances and durables to pass on the increase, thereby tamping domestic demand. The hike in export duty was aimed at curbing this inflation.

Says Hetal Gandhi, Director, Crisil Research, “The duty-driven price correction will improve availability of steel in the domestic market as finished steel exports dwindle. This will directly impact India’s export volume in the current fiscal. Steelmakers will attempt to skirt the duties by bumping up exports of alloyed steel and billets, but that is unlikely to compensate for the loss of finished steel exports.”

For the record, the government also hiked the export duty on iron ore to 50% and that on pellets to 45%, alongside slashing the import duty on coking coal, pulverised coal injection (PCI) coal and coke to 0% from 2.5%.

The duty revisions will have a material impact on the export volumes of iron ore and pellets. Unlike steel, where specific grades were targeted, iron ore and pellets are effectively under a blanket export duty. The combined export volume of iron ore and pellets is expected to see a massive drop from 26 MT last fiscal to 8-10 MT in the current one, and bring about a sharp correction in domestic prices. To be sure, merchant miners have already reduced iron ore prices by 25-35% since the announcement.

The removal of import duty on coking coal and PCI coal, meanwhile, has brought down the costs for integrated steel producers, who are largely dependent on the import market.

The export duty imposition on steel and iron ore by the government was able to tame the uncapped rally in domestic steel prices. Steel prices (ex-factory) which averaged ~Rs 77,000 per tonne in April, had already cooled off by Rs 4,000-5,000 per tonne in early May in line with global prices. The duty imposition has driven prices down further, as current prices stand close to Rs 14,000-15,000 per tonne lower than the April peak. Further, global prices (FOB China) have also corrected, with landed prices for hot-rolled coil (HRC) having fallen below domestic prices.

Falling steel prices, in turn, have aided recovery in domestic demand in the flat segment. Auto production and construction activity picked up in June. With monsoon setting in, a seasonal moderation in demand is expected, which will put further downward pressure on steel prices.

Says Koustav Mazumdar, Associate Director, Crisil Research, “Correction in steel prices was already on the cards as global prices started correcting. The duty revisions have alleviated the uncertainties linked to global markets and set the tone for a quicker correction in the near term. As of mid-June, prices are already at Rs 62,000-64,000 per tonne and can be expected to trend below Rs 60,000 per tonne by the end of the fiscal.”

An interesting trend to look out for this fiscal is the difference in margin contraction for large players and small- and mid-sized ones. Large integrated players with flat-steel based capacities export ~20% of their output, while small- and mid-sized ones are predominantly in the long steel segment, where exports are negligible. Hence, we could see a relatively higher contraction in operating margins of large players as export opportunities dwindle, while it would be less pronounced for small-and-mid-sized players, especially with raw material cost pressures alleviated to an extent.