STEEL : Stretched and squeezed
Reduction in import duty on CR/GP/GC affects steel
Budget Provisions
|
Particulars |
Excise Duty (%) |
Customs Duty (%) |
| Existing |
Proposed |
Existing |
Proposed |
| HR Coils |
16.00% |
16.00% |
25.00% |
25.00% |
| CR Coils |
16.00% |
16.00% |
35.00% |
30.00% |
| Galvanised Plates |
16.00% |
16.00% |
35.00% |
30.00% |
| Bars/Rods/Structurals |
16.00% |
16.00% |
35.00% |
30.00% |
| Ship Breaking scrap |
N.A. |
N.A. |
5.00% |
15.00% |
| Seconds / Defectives |
N.A. |
N.A. |
35.00% |
40.00% |
Budget Provisions Vs Expectations
| Parameter |
Expectation |
Proposed |
| Excise Duty |
Reduction from 16% to 8% |
Retained at 16% |
| Duty differential between HR and CR Steel |
10%, as in the previous year |
Reduced to 5% as Import duty on CR steel reduced to 30% while HR steel retained at 25% |
| Import duty on Zinc |
Reduction from 35% to 5% |
Reduced to 15% |
| Import duty on refractory raw materials |
|
Import duty on refractory raw materials like natural graphite powder, silicon metal, sintered alumina, fused zirconia and boron carbide reduced by 10% |
| Import duty on limestone, non coking coal and melting scrap |
To be reduced |
Not reduced. Instead Concessional rate of 5% duty on metcoke imported by Pig Iron manufacturers has been extended to manufacturers using COREX technology. Import duty on metallurgical coke reduced. Customs duty on graphite electrodes of above 24 inches diameter reduced by 10% to 15%. |
| Duty differential between seconds/ defectives and primary steel |
To be atleast 20% |
Proposed at 15%. Customs duty on primary HR steel is 25% while that on seconds / defectives is 40% |
Reactions
Mr.Arvind Pande, Chairman of Steel Authority of India, said "The steel industry, being hard-hit by recession, was looking forward to some relief. We are disappointed, as no reduction in customs duty has been provided to imported coal, which is a major input for steel making.
Whether steel demand actually gets stimulated with higher outlay on roads, highways and the power sector is yet to be seen. Growth in steel consumption is critical for the rejuvenation of the Indian steel industry.
As far as imports are concerned, India was becoming a dumping ground for foreign steel seconds/defectives. The higher customs tariff on steel seconds/defectives is a much-required measure. Moreover, ship-breaking scrap was finding its way into the construction market, jeopardising the safety aspect of construction and violating other norms. We are happy that a higher duty has been imposed on this material. This will help regulate the entry of such scrap into our country."
RC Nandrajog, Vice President-Finance, Tata Iron & Steel Company said,
"There were a number of issues with steel industry which were not addressed and some of them have not been resolved.
"I think it was not a bad budget for the steel industry. The FM has tried to address the problems in an indirect way. With the customs duty being increased from 35 to 40% on secones and defectives, imports should stop. This is likely to hike the demand for domestic steel and increase steel prices domestically.
"The increase in customs duty on seconds steel has come at the right time as, imports had trebled this year to around 3.6 lakh tonne.
"I feel that the sops to the agricultural sector should also perk up the steel industry as rural demand for steel could increase."
Current industry status
The consumption of finished steel increased by a mere 0.6% to 19.73 million tonne in the nine months ended Dec’01. To aggravate the matter, the steel exports suffered heavily on account of various tariffs and non-tariff barriers imposed by the developed countries including Europe and US.
The steel prices have crashed on account of the global over supply situation, making survival difficult for most of the domestic players. At a time when the domestic players are struggling for survival due to overcapacity, poor demand growth and low international prices, the country witnessed dumping of poor quality seconds, which further depressed the domestic prices.
Industry impact
The reduction of import duty on CR/Galvanised steel reduced from 35% to 30%, which will adversely affect the industry’s pricing power. Even before this duty reduction, the Whole Sale Price Index of the Narrow CR Steel Strip prices crashed by 15.41% from 137.6 in the week ended 10th February 2001 to 116.4 in the week ended 9th February 2002.
The reduction in customs duty on inputs for steel industry, including metallurgical coke, raw materials for refractories etc will benefit the industry. Similarly, the industry will heave a sigh of relief as the customs duty on seconds / defective steel has been increased to 40% and on ship breaking scrap from 5% to 15%. This will increase the cost of such imported steel and hence its cut throat competition against domestic primary steel is partially arrested.
The budget has not provided for any boost in domestic demand for steel. Particularly, the power generation was not given due priority and appropriate budget allocation as expected by the industry.
The railway budget increased the freight rates for Iron ore, coal and limestone will adversely affect the industry already reeling under pressure. However, this adverse effect is partially mitigated by the reduction in for finished steel. The impact of increase in freight for raw materials is likely to be around Rs 40 to 50 cr p.a. for the industry, of which SAIL alone is likely will incur Rs 25 cr. Overall, the impact of railway budget on the industry is marginally positive.
The removal of dividend tax will result in substantial savings to profit making steel companies (few in number!). This benefit will be partially offset by the increase in surcharge on Income tax from 2% to 5%. The increased depreciation by 15% for projects commissioned in FY 2002-03, though welcome, may not benefit the industry, as project expansions in the steel industry have virtually come to halt.
On the whole, the impact of the budget on steel industry is negative.
Company impact
Galvanised steel producers like Jindal Iron & Steel will benefit from reduction in the import duty on Zinc. But such benefit will be overwhelmed by the loss of pricing power on account of reduction in the customs duty on galvanised steel. Likewise, Essar Steel, which uses COREX technology will benefit from concessional duty on metcoke.
The railway budget is marginally positive for Tata Steel, as it is not adversely affected due to increase in freight on inputs, as its coal and iron ore mines are closer to plants. SAIL will be adversely affected by increase in operation cost by Rs 25 cr, but its sales are likely to be higher on account of the expansion programme of railways.
Overall, Companies concentrating more on Flats like Tata Steel, Essar, Jindal Vijaynagar Steel are likely to be adversely affected. Companies concentrating on longs like Rashtriya Ispat Nigam will be relatively less affected.
Best Buys/Sells
Impact of budget on the steel industry is negative. Hence, avoid steel scrips.
Powered by 
YOU MAY ALSO WANT TO READ:
The Rediff Budget Special
The Rediff-Capital Market Budget Analysis
More Budget Stories
Money
