The government's bid to rein in inflation by imposing export duty on steel products may result in an oversupply in the domestic market.

Export duty of 15 per cent on the primary products will increase the supply of hot rolled products in the domestic market.

The export disincentive for cold rolled and galvanized products, in which HR products are used as an intermediary, could aggravate the situation.

The steel producers may either absorb the duty and sell below cost in the international market and increase prices in the domestic market, or shun exports and resort to production cuts.

"We will take a call once we see the notification," said a primary steel producer.

Essar Steel [Get Quote] Holding CEO J Mehra said the move had serious implications. "Unless the government takes initiatives to facilitate additional capacities, such measures are counter-productive. The move will hinder the steel companies from increasing capacity, which is the need of the hour. The industry has been pointing this to the government for quite some time but without effect."

Industry sources said steel prices in the international market were higher by 100-200 euros on an average. Domestic HR coil prices are ruling at around Rs 35,000 per tonne, ex-plant, as the companies have decided to hold prices to moderate inflation.

Exports during April 2007 to February 2008 were around 4.2 million tonnes, of which galvanized plain/galvanized corrugated accounted for 1.85 million tonnes, CR 0.47 million tonnes, HR 1.41 million tonnes and long products 235,000 tonnes. These were valued at Rs 26,000 crore.

Anil Sureka, executive director (finance), Ispat Industries [Get Quote], said the imposition of export duty and withdrawal of import duty would mean slower growth for the industry.

"Duty cuts on some of the raw materials will help rationalise cost in a marginal way. However, the industry has been exporting after fulfilling the domestic demand. With exports becoming unviable, lower capacity utilisation will add to the cost."

He said most of the steel companies had imported capital goods under the EPCG scheme and had taken export obligation against it. The imposition of export duty would deter servicing of EPCG obligation and other existing contractual export commitments, he added.

The export duty is likely to hit galvanised steel producers the most. A cold rolled and galvanized steel producer said the domestic capacity was around six million tonnes, while the domestic demand was to the tune of 1.5 million tonnes.