Steel sector – Export duty cut a welcome step but with limited benefits

Experts suggest it would not be correct to state that the imposition of export duty was the only key reason for correction in domestic steel prices. It should be noted that prices were already in correction mode when the export duty was imposed.

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The long wait of Indian steel producers, for the abolition of export duty imposed by the Government of India (GoI) during the middle of first quarter of current financial year, finally got over. On November 18, the government announced the waiver of export duty on steel and steel making raw materials from India, thus, once again opening the doors of overseas markets for Indian steel companies.

The government has reversed the export duty on iron ore with grades lower than 58 percent to nil (from 50 percent earlier) while export duty on iron ore with grades higher than 58 percent has been reduced to 30 percent (from 50 percent earlier). Export duty on pellets has been rolled back to nil (from 45 percent earlier) while export duty on pig iron, hot-rolled/cold-rolled alloy and non-alloy flat steel products of 600mm or more in width has also been slashed to nil as against 15 percent earlier.

Further, GoI has also reinstated import duty on coking coal, PCI/anthracite coal and ferronickel to 2.5 percent (from nil earlier). Import duty on coke and semi-coke has also been reinstated to 5 percent (from nil earlier).

A welcome step

The export duty remained in force for over six months and the abolition has come at a time when the slowdown in global economy has significantly affected the demand for steel. Also, the global prices have witnessed a meltdown as the world’s biggest consumer, China, struggles with its battle against COVID-19.

Nonetheless, “the removal of duty is a welcome sign and is expected to boost exports of iron ore and steel”, said analysts at the brokerage firm, Motilal Oswal Financial Services.

Benefits for the sector

With the removal of export duty, export volumes are expected to pick up, especially, given the low base. Data shows that the exports for October 2022 have declined 66 percent on-year and by 38 percent compared to the previous month (September). At the same time, exports during the seven months of FY23 have declined by 55 percent.

According to the analysts at JM Financial Services, “finished steel inventory had witnessed ~20 percent increase from March–September 2022 which will likely result in higher exports as steel companies start chasing global markets”.

Also, the cost competitiveness of India versus other Asian countries will significantly improve post the roll back of export duty.

Removal of duty on pellets will aid pick up in pellet exports which could lead to demand uptick for iron ore.

“We believe that with the export duty out, steel companies would resort to higher production with surplus moving into export markets from December onwards, though the full impact shall be visible in Q4FY23 onwards,” a note from Motilal Oswal Financial Services said.

Export duty not the only culprit for the sector

Experts are of the opinion that it would not be correct to state that the imposition of export duty was the only key reason for correction in domestic steel prices. It should be noted that prices were already in correction mode when the export duty was imposed.

“While the imposition of export duty hastened the correction in domestic steel prices by driving away demand from the trade, peak coking coal costs in the same period ate into its margins and resulted in JSW Steel and SAIL posting net loss while Jindal Steel & Power and Tata Steel witnessed more than 50 percent YoY erosion in PAT,” said the analysts at Motilal Oswal Financial Services.

Prices to remain under pressure

There is not going to be a significant impact on steel realisations given India’s export price is at a steep discount to domestic hot rolled coil (HRC) price.

It is worth noting that while the export duties have been withdrawn, the global steel sector is in a difficult phase and domestic HRC prices are not expected to increase on account of the roll back in export duty unless international HRC prices improve, which ironically, have no relation with the export duties.

Views on the stocks

Among the stocks from the sector, experts believe that NMDC is likely to be the biggest beneficiary from the roll back of the duties, which will also help the company raise volumes. NMDC had unexpectedly reduced prices by Rs 300 per tonne in November 2022 against  analysts’ expectations of a marginal hike. However, the reversal of export duty should largely neutralize the price cut taken by the company in November. The brokerages have upgraded the stock to ‘buy’ (Motilal Oswal Financial Services) or have increased their target price (JM Financial Services).

The analysts at Motilal Oswal are of the opinion that flat steel-oriented companies will not benefit as much from the rising iron ore and pellet prices as much as the long product manufacturers. “This is because we do not expect any material increase in HRC prices unless Chinese economic situation improves and hence, we reiterate our neutral rating on JSW Steel and Tata Steel”, they said. Post Q2FY23 results, the brokerage has downgraded SAIL to neutral, owing to its rising debt.

Jindal Steel & Power remain the top pick of the analysts at Motilal Oswal and JM Financials in the ferrous space along with NMDC. However, the experts at JM Financial hold a positive view on Tata Steel as well.

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