Budget 2019: Domestic steel industry pins high hopes on Modi government
Budget 2019 India: The Union Budget presentation of the new government is keenly awaited. Indian economy for the last two quarters has been facing challenges in terms of subdued manufacturing growth and job creation, liquidity problems, slow agricultural output and uncertainty in business scenario culminating in lower GDP growth (fourth quarter GDP of 5.8% and 7% for FY19). It is therefore much expected that a few economic stimulus measures would be announced in the Budget to bring the economy back on track.
First, the budgetary allocations in infrastructure sectors like roads, railways, airports, irrigation, among others. Ports, urban and rural infrastructure, construction of residential and office complexes, water supply and sanitation, power projects, among others, are to be enhanced significantly to arrest the declining FAI in GDP in India. This alone would generate significant rise in demand for commodities (steel, cement and others) in the coming months and would result in other associated benefits originated from the multiplier impact to generate more income and employment.
This budgetary fund deployed out of tax and non-tax revenue is to be supplemented by FDI flows in specific sectors which is on the rise. Once the public investment comes in, the private corporate investment which had a declining trend in the recent past would also follow suit in those areas. The potential areas of private investment belong to affordable housing, stretches of national and state highways, ports, airports, smart cities and real estate. The RBIhas already brought down repo rate by 75 basis points to make credit less costly to boost up household consumption and help the industry to reduce cost of working capital and incentivise the long term investment. The lowering of rate of inflation (WPI for May 2019 at 2.45%) has made RBI more concerned on accelerating the economic growth of the country.
For steel industry, the higher investment allocation would lift up the subdued business sentiment which is acting against encouraging private corporate investment and raising the animal spirits in various critical sectors of the economy.
The PMI for manufacturing in the recent months can move up with improvement in business sentiments. As the price of finished steel has experienced a rough patch in the past three months (HRC ex-works at Mumbai, excluding GST, comes down from Rs42,000 to Rs 40,250) — a fallout of the decline in global prices (HRC SS-400 FOB Tianjin port China currently ruling at $489 per tonne falling from $535 per tonne in March 2019 and rebar export FOB Turkey currently ruling at $458 per tonne falling from $485 per tonne in March 2019), while the input prices have gone up during the period.
It is interesting to look at the price trend of the major inputs for steel making. The benchmark international price of iron ore (Fe 62%) CFR China is ruling at $109.4 per tonne which is 26% higher than the price operating in March 2019, while the price of prime quality coking coal fob Australia ruling at $195.5 per tonne, although around 8% lower than the price operating in March 2019, is significantly high. The HMS Scrap prices 80:20 basis CFR Turkey currently ruling at $280 per tonne although around 13% lower than the prices in March 2019 has been projected to rise in the next few months. As the domestic iron ore prices depend on the import parity, there has been a corresponding rise in domestic prices of iron ore. The rise in input prices and drop in finished steel prices have reduced the margin available to the producers and has affected the profitability in steel industry.
The import duty reduction of basic inputs would go a long way in supporting the causes of steel industry under such a scenario. The imports of scrap (limited domestic availability) and coking coal (high ash content of domestic coking coal) would continue for a few more years which would necessitate regular imports of these two raw materials. The removal of basic customs duty of 2.5% on imports of Ferro Nickel (an essential input for SS grade), all types of scrap (carbon, alloy and SS), iron ore and metallurgical coal would enable the domestic steel players to bring down the cost of production and stay afloat. The anticipated loss of revenue can be more than compensated by more GST returns by higher production of steel and reflecting in more demand for domestic raw materials. A higher steel production implies more transportation of finished steel and raw materials and more freight earning for logistic suppliers.
Rising imports of steel has further aggravated the supply scenario. While in FY19 India has imported 8.8 MT of steel (rise of 4.6% over last year) thereby making the country a net importer, the import flows in the first two months of the current fiscal at 1.2 MT is nearly catching up last year’s level. During this period the domestic steel consumption in the country has grown by 6.5% as compared to 7.5% rise in FY19. In order to arrest the surge in imports, the domestic steel industry has already filed a safeguard duty petition with ministry of commerce. Meanwhile, it would be quite supportive to Indian steel industry to enhance the basic customs duty from the existing rates of 12.5% in Flats and 10.5% in Longs to 18% each in the minimum. This would provide some urgent relief to Indian steel industry to face unwanted imports flow diverted from the restricted markets of US and EU.