Custom duty on seconds and defective (on hot rolled coils) increased to 40% from the earlier 35%.
Custom duty on ship breaking scrap increased to 15% from the current 5%. CVD (counter veiling duty of 16%) and SAD (special additional duty) are exempted.
Custom duty on graphite electrode of size above 24'" reduced to 15% from the earlier 25%. Custom duty on refractory raw material (micro silica/fume silica) reduced to 25% from the earlier 35%.
By the year 2004-05, there will be only two basic rates of custom duties. 10% covering generally raw materials, intermediaries and components. 20% covering final products.
Budget Impact
Higher custom duty on seconds and defectives: Increasing imports of low priced prime as well as seconds/defectives is adversely affecting the growth of the Indian steel industry. By increasing the custom duty to 40%, the government has protected the domestic steel industry to an extent. (The total finished steel production recorded a marginal growth of 0.9% during the period April to January 2002. This growth was much lower than 12.1% growth recorded in the comparable previous period.)
Higher custom duty on ship breaking scrap: The custom duty on ship breaking scarp at 5%, is the same as steel melting scrap. About 65% ship breaking scrap is re-rollable on which the custom duty is 25%. This is having an adverse impact on the prices of finished products of steel (bars, rods and structurals) in the open market. Increasing custom duty on ship breaking scrap to 15% is expected to reduce the disparity in prices between rolled products produced by the steel plants and cheaper products produced from ship breaking. This is likely to benefit, steel companies including Tisco, which are facing pricing pressure on steel bars, rods and structurals sales from the cheaper products produced from ship breaking scrap.
Reduction in custom duty on raw material: Steel industry, which has been affected by slowdown in demand, is likely to benefit by lower custom duty on their raw materials (natural graphite powder, silicon metal, sintered alumina and boron carbide). Reduction in duty to an extent would help them in bringing down their cost of production. Also reduction in petrol and diesel rates is likely to benefit steel companies in terms of lower cost pertaining to production and transportation.
Increase in freight rates: The railway budget has increased freight rates on coal, raw material used in steel making and iron ore. Increase in raw material prices is likely to inflate cost of production of steel companies. These cost (power, freight cost and iron ore) together accounted for about 35% of Tisco's raw material cost in FY01 with freight cost alone forming 9% of total sales (freight rate is almost 130% of the basic cost of iron ore).
Industry wish list
The industry is demanding an across the board hike in custom duty on steel products to 40% (for a minimum three years) and a reduction in excise duty from 16% to 8%.
Custom duty on scrap steel to be raised from the existing 5% to 25%.
The committee comprising representatives from the steel companies wants a ban on import of defective steel items. The panel has also proposed that the inputs on indigenous steel be exempted from the 4% special additional duty (SAD).
In order to protect the Indian steel industry, directorate general of anti-dumping and allied duties (DGAD) has recommended imposition of provisional duties against imports of cold roll flat products from US, European Union, Japan and Canada.
Excise duty on steel (rods, bars and galvanized sheets) used for construction should be brought down to 8% from the current 16%. This would boost housing and infrastructure activity.
Steel companies and financial institutions are asking for infrastructure status and permission to steel companies to issue bonds guaranteed by the government.
In the previous budget, steel pipes, tubes and other steel based products imports from Nepal were allowed without any basic custom duty. Confederation of Indian Industry (CII) demands that this should be restricted to such products for which inputs or raw materials are sourced from Nepal.
Key Positives
It is estimated that infrastructure spending in the country will touch US$ 200 bn over the next five years. The biggest beneficiary of this spending will be the core sectors, which includes steel.
Indian steel companies are working towards geographically demarcating markets, where each one will operate exclusively without competing to tackle the slowdown.
The only encouraging sign for the Indian steel industry is its low cost of operations. India has abundant high quality iron ore, limestone and coal, which are the main raw materials in the manufacture of steel.
Key Negatives
Anti dumping duties imposed by US is likely to trim demand for Indian steel products. Also, removal of quantitative restrictions is hitting the steel industry through cheap imports. With the US economy slowing down, countries with surplus stock will be looking for markets to dump their products. In such a scenario, Indian companies stand to lose.
Due to downturn in the US economy, growth in a lucrative export market has begun to decline.
Globally, steel production is likely to touch 850 m tonnes in the current year, creating an excess capacity of 250 m tonnes. This excess supply is likely to keep prices under pressure at least in the next six months. With realizations remaining subdued, companies are discouraged to make further investments in the sector and are opting for diversifications.
