Post Budget Analysis - Steel Sector

As we mentioned in our pre budget update steel industry has been impacted by the slowdown in global consumption. The domestic steel sector is facing problem of iron ore shortages in the country due to ban on iron ore mining ban.  Both these factors have impacted the domestic steel players in the past as falling demand and high input prices led to margin erosion of these companies.

International steel prices have fallen and threatened the steel companies in terms of higher steel import and falling domestic prices which are currently insulated by the high rupee depreciation value.

With respect to the current situation, expectation of the steel industry from the budget was to reduce the excise duty on the steel products and increase the import duty in order to protect the industry from higher imports.

Positive

Increase in the custom duty from 5% to 7.5% on the import of Flat rolled HR and CR steel will come as positive news for the industry which has been reeling under the pressure of slowdown in demand globally. By increasing the freight rates, the Indian government has tried to protect the steel industry from the foreign steel players who are currently looking to de-stock their inventory at cheaper rates due to global slowdown. This year budget has provided much needed relief for the domestic steel companies and we can see the impact on the HR and Cr steel prices which will move upward in the near term. 

Positive

The iron ore export duty has been kept unchanged at 30%. Earlier in Jan 2012 the export duty on the iron ore was hiked from 20% to 30%. 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. Continuing with the higher rate will ensure lower export and higher domestic consumption.

Negative

The increase in the excise duty from 10% to 12% has not left much room for the steel companies in terms of margin expansions. The industry has been facing severe margin pressure due to recent hike in the freight rate by the railway’s. Also higher iron ore prices will continue to put pressure therefore we believe cement companies will feel the heat in the coming year.

Positive Infrastructure spending

There are indirect benefits that one can expect from the budget which may include a hike in infrastructure spending and timely implementation of the infrastructure projects such as highways, ports and power projects, etc. During the Twelfth Plan period, infrastructure investment will go up to Rs 50 lakh crore, of which the private sector is expected to contribute half of it.

On the infrastructure spending front, the major benefit is the tax free bonds for financing infrastructure projects which has been doubled to RS 60000 crore in FY13. Also to ease the access of credit to infrastructure projects India Infrastructure Finance company Limited (IIFCL) has put in place a structure for credit enhancement and take-out finance.

In conclusion we believe the 2012 budget has come on the positive note for the steel industry. Increase in the custom duty of flat rolled products, higher export duty on Iron ore and higher spending on the infrastructure sector are some of the factors that will give much needed fillip to the struggling industry.

However, the increase in the excise duty will impact the steel companies who are struggling to keep their heads high in the current weak global and domestic demand. The similar has been reflected in the stock performance of the major steel companies which has fallen by more than 1%today.