Govt decision to drop out of RCEP will benefit steel cos

The government’s decision not to sign the Regional Comprehensive Economic Partnership comes as a major relief for steel sector.

In recent past, the Indian steel market is flooded with cheap imports from RCEP members such as China, South Korea, Japan and Vietnam. Any multilateral free-trade agreements including China would pose a major threat for domestic steel producers.

Indian producers can effectively seek benefits of such partnerships only if adequate safeguard mechanisms are in place, said an India Ratings report.

India already has trade agreements in place with ASEAN countries, Japan and South Korea which could be leveraged for relevance in the Asian steel market through negotiation and collaboration.

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Moreover, Indian steel producers have low reliance on exports and opting out should not materially impact long-term investments and export plans under National Steel Policy 2017. Significant capacity expansion plans in India are largely based upon a healthy medium-to long-term demand outlook.

India Ratings expects long-term domestic steel demand growth should remain robust at about 7 per cent, supported by healthy economic growth and gross fixed capital formation.

China steel capacity

Allowing China to tap the Indian market duty-free could be perilous, given the large size of its capacity which can create a large imbalance in domestic demand-supply dynamics.

China’s total steel capacity and their domestic steel consumption is about 10 times of India and about half of the total world. Hence any minor demand or supply fluctuations in China result in serious implications for the global steel dynamics.

Additionally, China government’s stimulus measures including export incentives to its steel industry further pose risk of China dumping steel globally. India being the largest steel market after China becomes an important destination for China to dump its oversupply, despite India having sufficient capacity to meet its requirements.

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Compared to China, India’s overall cost of steel deliveries is estimated to be higher by about $40 a tonne due to the cost disadvantages of about $90 a tonne such as inferior logistics and infrastructure, higher royalty and tax burden on mining, expensive power and cost of capital.

India also has high reliance on imported coking coal for its blast furnace route steel producers which poses raw material availability and price risks, constraining India’s steel sector competitiveness. However, India too has cost advantage of about $50 a tonne mainly in the form of its cheap iron ore and labour availability.