Steel stocks cascade down on Government’s imposition of export taxes

The Centre imposed an export tax of 15% on eight steel products late on Saturday 21^st May 2022. It also waived customs duty on the import of some raw materials, including coking coal and ferronickel, used by the steel industry, a move which will lower the cost for the domestic industry and reduce the prices.

Export duty on iron ore has been increased to 50% from 30% for lumps across all grades, while that on pellets has been imposed at 45% from nil earlier, making exports unviable. Further, the government has imposed a 15% export duty on hot-rolled and cold-rolled steel products from nil earlier. It comes as a massive blow for steelmakers are looking to make up for tepid local demand by increasing market share in Europe, whose supplies have been hit by Russia’s invasion of Ukraine.

Steel stocks faced deep cuts in Monday’s trade after the announcement of export duties, which may prompt steel companies to review their capacity expansion plans.

Data at 12:00 PM on 23rd May 2022

Steel makers to review capacity expansion plans

Commenting on this development, VR Sharma, managing director at Jindal Steel and Power told Reuters that the immediate outcome of such a decision is that Indian steel firms could be forced to cancel European orders and suffer losses after an overnight decision to impose export taxes on steel products. “They should have given us at least 2-3 months of time, we did not know about such a substantial policy,” Sharma told Reuters.

Russia and Ukraine exported 46.7 million tonnes in 2020, mostly to the European Union, the world’s second biggest importer of steel, according to the World Steel Association. The decision could raise industry costs by as much as $300 million, he said. “We alone have 2,60,000 tonnes of orders, which were taken when export duty was zero,” Sharma said.

JSPL, India’s fifth-largest crude steel producer, targeted boosting its exports to 40% of sales, mostly to Europe. It might review its plans considering the latest developments. The export taxes on steel are part of a series of changes in taxes on crucial commodities aimed at reining in retail inflation, which has hit eight-year highs. Removal of import duties on coking coal, PCI coal and anthracite and imposing an export tax on iron ore, all key raw materials used in steelmaking, might not be enough to soften the blow to exports. According to steel industry veterans, coking coal prices are still very high and the export tax would benefit local carmakers and other heavy engineering industries, but impact exports.

The Centre’s decision may force local steelmakers to review of capital-expenditure (capex) plans. According to industry veterans, they face stiff competition from Chinese and Russian mills globally and may lose export market share to them.

India’s steel exports in FY20 stood at 11.2 million tonnes, while the same rose to 18.4 million tonnes in FY22.

Indian Steel Association fears loss of international trade

The steel industry fears that the quantity (export) cannot be absorbed in the domestic market as almost all steel manufacturers will be impacted by this decision.

The steelmakers’ body – Indian Steel Association (ISA), said that the industry welcomes the removal of import duty on coking coal and few other input raw materials for the industry. However, the imposition of export duty on steel will only send a negative signal to investors in the steel sector and will adversely impact the sector’s capacity utilisation. India has been increasing its engineering and steel exports over the last two years and has the potential to become part of a larger global supply chain.

India may lose the export opportunities now and this decision may also impact the overall economic activity in the country,” the association said.

The imposition of export duty will help other countries to increase their share in the global market, which will be India’s loss. Regaining the lost ground may take a long time, as the supply chain will be disrupted, while India’s credibility as a reliable exporter will take a hit, according to the ISA.

Considering this decision, new capacity creation may get impacted as they would be seen as uneconomical thus affecting the much-awaited investment against PLI scheme for speciality steel.” Besides, it may have a major impact on the entire supply chain in the long term. The economic activity of a few states dependent on minerals and steel will be further hit.

Steel stocks take a beating on the announcement

On Monday, 23rd May 2022, within few minutes of the opening bell, three steel shares hit the lower circuit, namely Tata Steel, Steel Authority of India (SAIL) and JSW Steel.

Tata Steel share price today opened with a downside gap of near ₹73 per share and went on to hit the lower circuit at ₹1053.20 apiece levels on BSE. SAIL share price nosedived in early morning deals and hit lower circuit at ₹74.70 levels on BSE. Similarly, JSW Steel’s share price opened under huge selling pressure and hit lower circuit at ₹567.80 per share levels.

Most brokerages too consider this development as a negative for the steel industry. ICICI Securities in a report says, “The Indian government has imposed export duties on steel, steelmaking raw materials and intermediaries to preserve higher domestic supplies and control rising prices. Most of the exports of steel/stainless steel will attract 15% export duty now (from nil earlier). We see this as an extremely negative development for the steel sector and expect broad-based multiple de-rating. We downgrade Tata Steel, JSPL, JSW Steel and SAIL to REDUCE.” In fact, India’s ‘iron and steel’ exports constituted 5.5% of total exports in FY22 – the highest at least since FY04,” was the analysis of brokerage firm Motilal Oswal.