Steel Industry: Infrastructure Spending To Boost Demand

Steel is a global commodity and a large part of the consumption comes from construction, infrastructure and the automobile sector. Moreover, the consumption of steel is linked to the growth of the economy. If the economy grows, the consumption of steel also rises as it includes the overall development of the country - it being the backbone of any industrialised society. However, due to a continuous hike in the interest rate and the tight liquidity situation that has impacted the investment cycle, there has been a slowdown in demand in the fiscal year 2011. As per a Joint Plant Committee report, the consumption of steel in the last nine months has grown by just 4.4 per cent on a YoY basis. This has largely been on account of the slowdown in the economy which has grown by 6.1 per cent in the third quarter of 2011 - slowest in the last two years - and by 6.9 per cent in the first nine months of the fiscal year.

As per the latest GDP numbers, lower production from the mining and manufacturing sectors has been one of the major reasons for the fall. This also means that the lower production is largely on account of the reduced demand. This has been coupled with high raw material cost and the escalating power & fuel cost which has made the situation very challenging for the steel companies. However, depreciation of the rupee has insulated the domestic steel prices from the fall seen in the international prices which resulted in better realisations for the steel companies in the third quarter of 2011. At present there are three major steel producers in India viz. SAIL, Tata Steel and JSW Steel. The steel sector mainly comprises steel mills, iron and steel foundries and the suppliers of ferrous scrap and iron ore. Iron ore mines provide the major raw material from which iron and steel products are made.

Budget Expectations

Last year the budget was neutral for the steel sector though the industry received indirect benefits on the iron ore front as the government proposed to increased export duty on all types of iron ore and unify it at 20 per cent from the earlier 15 per cent in the case of lumps and 5 per cent in the case of fines. This was mainly done to conserve natural resource from early extinction. We believe that the increase in export duty will benefit the industry in the long run as conservation will help the industry to continue to be self-reliant in terms of its iron ore requirement. Further, in the month of January 2012 the export duty was raised to 30 per cent and this was done mainly to support the steel industry which was facing severe problems with regard to the availability of iron ore at fair prices.

On this front the miners have asked the finance ministry to reduce the export duty on iron ore as it has been impacting the margins of the companies. However, we believe that the government would like to continue with a similar duty structure on iron ore as the steel industry continues to face the issue of shortage of iron ore. Also, illegal mining and unauthorised exports carried out by various companies are still under the scan of the concerned ministry and the Supreme Court and therefore we do not see any cut on duty in the upcoming budget. A hike in iron ore export duty will dent the margins of companies like Sesa Goa and NMDC.

Scrip Performance Of Major Companies Since The Last Budget Announcement 

Last year’s budget didn’t offer much benefit in terms of excise and custom duty on the import of iron and steel and the government kept all the rates intact. The excise duty on iron, non-alloy steel and other stainless steel products is currently at 10 per cent while the custom duty on these products is at 5 per cent. This year too we will not see any cut in excise and custom duties. Higher spending by the government this year has widened the fiscal deficit and to keep it under control the government will choose to defer on any excise cut in the upcoming budget.

However, last year, on the input side the government had offered some relief to producers of steel from scrap which was reduced from 2.5 per cent to Nil. This wasn’t of much benefit as most of the steel producers in India use iron ore pellets for steel production. Coking coal is currently exempted from any custom duty as the steel industry imports 80 per cent of its requirement due to the non-availability of coking coal in India. And we expect this to continue in the upcoming budget also.

Our View

As explained above, we do not expect anything from the upcoming budget for the steel sector. We believe that the government will keep the excise (10 per cent) and custom duty (5 per cent) on steel and steel-related products unchanged. Further, import duty on iron ore and coking coal may also remain at the current level. The import duty on iron ore will remain at 30 per cent while coking coal will continue to remain exempted from any import duty.

Meanwhile, one can always look for direct benefits for the steel industry which we believe is currently more or less in favour of the steel sector. However, there are indirect benefits that one can expect from the upcoming budget which may include a hike in infrastructure spending, timely implementation of the infrastructure projects such as highways, ports and power projects, etc. An increase in infrastructure spending coupled with higher spending on rural and urban housing development, consumer durables and the auto sector will finally provide a boost the demand for steel.

Budget Wish list: 2012-13

The Union Budget of 2012-13 comes at a time when there are significant signs of slowdown in the economy. The economy is in desperate needs of a policy boost from the Indian Government for its revival. Infrastructure will be the focus area in this year’s upcoming budget. Some of our expectations from the Union Budget on infra, mining & power are:

1. Rise in Import duty on HR Coils.
2. Abolish or reduce the export duty on iron ore fines, lumps & pellets to increase the profit margins of miners.
3. Provide additional incentives to iron ore producers to add value to the mineral and pelletisation so as to encourage its conservation for domestic use.

Manoj Agarwal, Managing Director, Adhunik Metaliks Ltd.