The government’s decision¹ last week to withdraw export duty on steel products and raw materials will improve sector sentiment but may not materially increase the near-term earnings of domestic primary steel manufacturers² because of subdued global demand. However, in the long run, it should improve export competitiveness of the additional capacities being set up.

The decision came after India’s finished steel exports plunged ~50% on-year in the first half of this fiscal to 3.6 million tonne, and for the first time since fiscal 2019, the country became a net steel importer between July and August.

At present, world demand outlook is weak given recessionary headwinds. This is reflected in global steel prices, which are 5-7% lower³ than domestic prices. Between February and April — before the imposition of duty — the export premium was 2-3%. Exports have thus become less remunerative except for strategically regaining market share in geographies like Middle East and Europe.

Says Manish Gupta, Senior Director, CRISIL Ratings, “Pellet producers could be the biggest beneficiaries of the reversal of export duty. That’s because, domestic prices are at a steep 35-40% discount to current global prices of $120-125 per tonne. While this incentivises exports, doing so would have a bearing on domestic primary steel producers as their input prices⁴ would rise. This, coupled with some inventory destocking through exports, could increase domestic steel prices by Rs 500-1,000 per tonne in the near term.”

The government also increased import duty on coking coal — a key raw material for steel production — to 2.5% from nil earlier. Global coking coal prices have corrected ~45% between April and September.

The expected increase in domestic steel prices after the duty increase will thus not lead to earnings gain for primary steel producers. But their operating margin should rebound in the second half of this fiscal after moderating 14-15% in the first half⁵ mainly on the back of lower production cost⁶.

In the long term, the removal of export duty will help increase export competitiveness of domestic steel makers, especially since they are in the process of adding 32-34 million tonne of capacity over the next five fiscals, which is more than 20% of current total capacity.

Says Ankush Tyagi, Associate Director, CRISIL Ratings, “While the increased capacity would mainly cater to domestic demand, which is slated to grow at a healthy 5-6% compound annual growth rate through fiscal 2027, improved export competitiveness will bolster utilisation and operating profitability. The government’s move is in line with its Atmanirbhar Bharat initiative, which aims to make India a steel producer of scale, and can position domestic producers as globally competitive backed by integrated operations.”

Credit profiles of domestic steel makers are seen stable with deleveraged balance sheets and robust cash accrual supporting continuing capital expenditure.

That said, a sharper-than-expected correction in prices, weaker domestic demand, and significantly higher-than-expected input costs will bear watching.

1 The move includes withdrawal of the 15% export duty imposed on steel products, 45% on iron ore pellets, and 50% on low-grade iron ore (Fe, or iron, content <58%), along with a reduction in export duty (to 30% from 50% earlier) on high-grade iron ore (Fe content >58%).
2 Including Jindal Steel & Power Ltd, Tata Steel Ltd, JSW Steel Ltd, Steel Authority of India Ltd and Arcelor Mittal Nippon Steel India Ltd (erstwhile Essar Steel India Ltd)
3 Chinese hot-rolled coil f.o.b. prices
4 Steel pellets are used as an input for steel making by domestic producers as well
5 Operating margin for domestic primary steel players was ~ 30% in fiscal 2022
6 https://www.crisil.com/en/home/newsroom/press-releases/2022/09/margin-pressure-to-ease-for-steel-makers-in-the-second-half.html