A new export tax regime has put the steel sector in a dire situation. In May, the government imposed a 15% export duty on finished steel products to curb exports and increase domestic supplies to the manufacturing sector at competitive prices. Steel makers were also given relief to increase domestic availability of iron ore at lower prices by levying 50 per cent export duty, earlier it was 30% and removing 2.5%-5% import duty on coking coal and met coke respectively.
The relief measures are lauded but may not last long and the real purpose may be defeated as the government has switched to little value-added iron ore-semi-finished steel outside the purview of export duty . This shortfall could lead to supply crunch and inevitable rise in steel prices in the domestic market again.
Taking advantage of the remaining shortfall, Indian steel giants now turn to expand their export opportunities in semi-finished goods such as ingots, billets and slabs as 95% of India’s finished steel export basket is covered by 15% export duty. affected, which was previously zero. To fill this export gap, duty-free semi-finished steel export volumes could reach 10-12 million tonnes (MT) in FY22-23, surpassing war-torn Russia and Ukraine, which are 12 of the world’s largest steel producers. million were the largest exporters. Tons of semi-finished steel last year. An Indian rating agency has estimated that exports of semi-furnished, which declined 26% year-on-year (YoY) to 4.96 million tonnes in 2021, are likely to see significant growth in the current fiscal.
The loophole could again create volatility in the domestic steel market prices and possibly drag back the recovery of India’s fragile manufacturing sector. The government should also consider imposing export duty on semi-finished steel products. Also, imports of second grade steel should be reinstated for the same level of play.
In 2011, the government banned the import of second grade steel. The decision was based on the argument that import of low quality steel degrades the quality of the final products. However, the quality level is not specified in the official data and the quality decision in the market should be left to the buyers. In an open market economy, it is entirely the prerogative of the buyers to decide which products they wish to purchase. Therefore, the issue has to be tailored to the market realities.
impact of taxation change
After the imposition of 50% export duty on iron ore the export market for iron ore suddenly decreased by about 20%. The National Mineral Development Corporation (NMDC), the country’s largest iron ore miner and seller, has slashed prices drastically by around Rs 1,100 a tonne and now the lump sum ore is priced at Rs 5,500 a tonne from Rs 6,600 a tonne in May. Lower iron ore prices in the domestic market will also boost exports of semi-finished steel.
Today import of coke is more economical for major steel makers. A cost analysis by market intelligence agency Colmint shows that removal of 2.5% import duty on coking coal will result in savings of around Rs 1,100 per tonne and removal of 5% import duty on met coke attracts savings of approx. 2400 per tonne Thus, the direct effect of the change in taxation is a reduction of about Rs 3,500 per tonne in the production of semi-finished steel from iron ore. Semi-finished steel-ingots, billets and slabs in production cost India A 10% reduction has been made, which is now about Rs 43,000 per tonne or $525-$550 per tonne, compared to $625 per ton in China and Japan, as against the global average of around $575 per tonne.
the need for an independent regulator
Since steel is a deregulated sector, there is a need for an independent regulator for effective regulation, which is currently lacking in the sector. A new and dynamic steel policy is also needed.
Further, there is a need to examine the entire value chain associated with the steel industry, from iron ore to finished products production, to ascertain the precise constraints in this sector. An ecosystem has to be created that ensures the profitability of every player associated with the downline industries. Also, it needs to be checked that none of these generate windfall gains at the expense of the others. We have to make efforts in this direction to make the entire manufacturing sector profitable through direct government intervention or independent regulators.
way forward
Changes in export taxation are right steps taken by the government to boost manufacturing, infrastructure and construction, but keeping semi-finished steel out of the purview of export duty may defeat the purpose. There are five to six Indian steel giants, which are now exploring to increase the volume of exports of semi-steel, and in terms of abundant availability of captive iron ore mines and lowest production costs at cheaper prices than the global average cost. Already enjoying the inherent benefits. ,
It is sincerely expected that the government will not only keep in mind the interests of the steel sector giants at the cost of 6.4 crore MSMEs, who are the major allies of the manufacturing sector. With a holistic approach, the government may intervene to tighten the noose on semi-finished steel by imposing export duties and allowing import of secondary steel to maintain the competitiveness and growth of the country’s manufacturing sector.
The author is the Vice Chairman of Sonalika Group and former Vice Chairman of Punjab Planning Board. The views expressed in this article are those of the author and do not represent the stand of this publication.
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