Weighing a duty to protect steel

Indian steel firms have demanded imposition of higher duty on imports, apprehensive of dumping by China.

The firms argue that if the substantial investments they have made in creating domestic capacity are not protected, they will be forced to wind up shop.

The threat is one of sizeable imports from China swamping the market. A rough estimation shows that steel could be imported from China at prices lower than domestic rates.

For instance, SAIL's domestically-produced 2 mm hot-rolled coil commanded a price of Rs 38,500 (about $722.32 at an exchange rate of Rs 53.3 to the dollar) per tonne at the factory gate in April.

In contrast, the price of 2 mm HR coil in China is approximately $672.1 per tonne at present. Even after factoring in the current 5 per cent import duty and freight of around $30 per tonne, this takes up the landed cost of Chinese steel to around $735.7 per tonne. This is less than the price of domestically produced steel if local excise duty and other taxes are added.

Capacity to increase

At the same time, the sizeable investment made by the domestic steel companies needs to be taken into consideration. India is presently the fourth largest steel producer in the world, with an estimated production capacity of about 89 million tonnes per annum at the end of 2011-12. The Working Group on Steel for the 12th Plan has estimated that capacity will rise to 149 million tonnes by 2016-17.

If all this capacity does materialise, it may exceed domestic requirements. The Working Group on Steel for the 12th Plan expects domestic steel demand to go up by 10.3 per cent on an average annually to 113.3 million tonnes per annum by 2016-17.

The question, however, is whether this capacity will come up in time to meet India's ambitious target of $1 trillion in infrastructure spending for the current Plan.

One argument against the demand for higher import duty is that the country should allow a free play of market forces in the steel sector. Both exports and imports can be allowed so that domestic producers can take best advantage of global price cycles. In this way, the infrastructure sector too gets to source steel at global rates. After all, the Indian steel industry has withstood international competition over the past decade despite reducing basic Customs duty on steel from 25-30 per cent in 2002-03 to 5 per cent currently.

Pricing issues

In April-December, 2010-11, imports accounted for about 9 per cent of domestic requirements.

In addition, there is a high likelihood of the domestic steel prices going up further amid a drastic shortage of raw materials and rupee depreciation that has pushed up costs.

In such a scenario, the gap between international and domestic steel prices could widen significantly, resulting in a situation where home-grown manufacturers are rendered uncompetitive.

If the domestic capacity-addition plans progress as per schedule, the requirement for steel would be comfortably met within the country.

However, in the absence of assured demand, projects depending on the additional capacity would be rendered unviable.

At the same time, affording Indian steel-makers an uneven playing field could skew pricing dynamics further, resulting in a huge differential in the cost of domestic and international steel. The Government needs to take these factors into consideration while taking any decision.

arvind.jayaram@thehindu.co.in

COMMENT NOW