China steel mills may gain from cut in Customs duty
Chinese steel mills may stand to gain from the cut in Customs duty announced by the finance minister in the Union Budget. Spiralling steel prices led the government to cut Customs duty by 2.5-5.5 per cent on a range of products from semi-finished to flat and long products for the benefit of MSMES that have been at the receiving end. However, it may have an unintended beneficiary, which is China. Moreover, the cut has failed to rein in prices, as steel mills increased flat steel prices by ~1,500 a tonne after the announcement of the duty cut. According to steelmakers, as long as international prices remain strong, it would not have an impact on domestic prices.
Ranjan Dhar, chief marketing officer, AM/NS India, explained, “Steel prices are linked to international prices which are on the rise because of global factors. An import duty cut will not bring down prices, but only benefit exporters of non-fta countries (as FTA is already at zero duty). A few competing countries stand to gain, instead of our economy.”the biggest beneficiary among non-fta countries is likely to be China. As Jayanta Roy, senior vicepresident, ICRA, pointed out, China is among the key exporters of steel to India among non-fta countries.
In 2019-20, imports from China stood at 1.206 million tonnes. It used to be much higher, but a host of measures, including the anti-dumping duty helped bring it down over the past 4-5 years. In 2016-17, imports from China stood at 2.154 million tonnes. However, a temporary revocation of anti-dumping duty and countervailing duty on imports of various steel products from China was announced in the Budget.
The share of FTA countries in imports is higher; imports from Korea stood at 2.686 million 2019-20 and Japan at 1.018 million tonnes. As long as global prices are higher, domestic companies may be insulated from price pressure. But if Chinese prices keep dropping then it will have an impact on domestic prices, too. In the past one month, prices in China have dropped by about $80 a tonne due to a slowdown ahead of the Chinese new year.
According to a producer, with the current level of duty, domestic and landed cost of imports would be close. Roy said, “Domestic prices are pegged to landed cost. If Chinese prices soften then there will be pressure on Indian prices.” Whether the trend continues remains to be seen, but China’s steel trade has seen some normalisation. Chinas monthly steel exports rose for the first time after seven months of decline by 4 per cent year-on-year and 10 per cent month-on-month to 4.85 million tonne in December 2020. But even with a softening of global prices, it is possible that steel prices will remain firm on the back of strong domestic demand.
It has happened in the past domestic prices have ruled at a premium in spite of softening of international prices on the back of strong domestic demand, said Roy. “If the infrastructure spend takes off, then that scenario can’t be ruled out either,” he added. That may not augur well for user industries that have been hit by rising prices. Sanjay Budhia, chairman, CII National Committee on exports and imports, and managing director, Patton International, said this would be the final blow to the engineering sector.
“Engineering exports, which constitute 25 per cent of India’s merchandise exports, would definitely come to a grinding halt. There is no way exporters can bear this brunt,” he said. However, Dhar pointed out that an import duty cut was not a solution for MSMES. “As far as MSMES are concerned, they buy locally and do not import. Their solution lies locally. This segment needs domestic incentives like support in the supply chain,” he said. “Indian mills have been time and again undertaking a slew of initiatives to unlock their potential such as e-sales and steel retail,” he added.