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Budget 2005-06: Steel

Being a core sector, steel industry tracks the overall economic growth in the long-term. Also, steel demand, being derived from other sectors like automobiles, consumer durables and infrastructure, its fortune is dependent on the growth of these user industries. India has a per capita consumption of steel of around 30 kgs as against 180 kgs in China and an average of over 400 kgs in the developed countries. This wide gap in relative steel consumption indicates that the potential ahead for India to raise its steel consumption is high. Read more

Budget Measures

  • Duty on coking coal with high ash content reduced from 15% to 5%.
  • Duty on primary and secondary metals reduced from 15% to 10%.
  • Customs duty on industry raw materials such as catalysts and refractory raw materials reduced from 15% to 10%.
  • Excise duty on steel raised to 16%.
  • Customs duty on ferro-alloys and stainless steel and other alloy steel reduced from 15% to 10

    Budget Impact

  • The reduction in import duties of coking coal with high ash content and also on industry raw materials is a positive for steel players, as this would reduce their raw material costs thus aiding profitability.

  • The hike in excise duty to 16% will not be having any major impact, as the entire duty is modvatable by most category of consumers.
  • The reduction in customs duties on certain steel products by 5% to 10% will exert pressure on steel companies' intentions of raising prices.

    Sector Outlook

  • Going forward, while the demand scenario looks encouraging with China's efforts having failed (as yet) to reign in its economic growth and increased consumption in regions like US, EU and Russia, it is concerns on the supply front that could take a toll on steel prices. With most steel majors across the globe having already announced their capacity expansion plans, the increased supply in the medium-term could pose a serious threat to the sustainability of steel prices at the current levels. Further, China continues to remain one of the key determinants of how the performance of the sector would pan out over the next couple of years, as any shortfall in demand/imports from the country would lead to increased availability of steel for the international markets. This belief is further strengthened by the fact that as per reports, China was a net steel exporter in the closing months of 2004 as it increasingly meets its metal demand internally. Thus, over the medium-term, we would advise caution to investors considering the risk profile of the sector at the current juncture.

    Industry Wish List

  • Reduction in customs duty on coking coal with ash content of 12% or more to 10% from 15%

  • Reduce import duties on graphite electrodes (above 24" in size) from 15% to 10% (CII)

  • Reduce excise duty on steel (raised during the previous budget) from the current 12% (FICCI)

  • Rationalisation of duties on items such as ferro-alloys and zinc where duties are currently at 15% (SAIL)

  • Reduce import duties on cold rolled/hot rolled steel, alloy steel and die steel for used by the auto industry from the current levels (FICCI)

    Budget over the years

    Budget 2002-03 Budget 2003-04 Budget 2004-05

    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%.

    Finance minister reaffirmed the thrust on infrastructure development by announcing new infrastructure projects.

    Peak customs duty reduced from 30% to 25%.

    Decrease in freight rate by 5.3%. Confessional freight for short distance transportation.

    Tax sops maintained for the housing sector.

    Surcharge on corporate tax halved from the current 5% to 2.5%.

    Excise duty raised on iron and steel from 8% to 12%.

    Customs duty reduced from 15% to 10% on all primary, semi-finished and finished forms of iron and steel like ingots and billets, sponge iron, hot rolled and cold rolled bars/rods/coils of non-alloy steel (other than seconds and defectives).

    Customs duty reduced from 20% to 15% on ferro alloys, stainless steel and other alloy steel, excluding seconds and defectives.

    A surcharge of 2% on account of education cess will be imposed on corporate tax.

    [Read more on Budget 2002-03] [Read more on Budget 2003-04] [Read more on Budget 2004-05]

    Key Positives
  • Growth potential:  The per capita steel consumption in India is abysmally low at around 30 kgs as compared to 180 kgs of China and over 400 kgs in developed countries. This wide gap in relative steel consumption indicates that the potential ahead for India to raise its steel consumption is high.

  • The China effect:  Domestic steel companies have benefited immensely on the back of rise in international steel prices and demand. The prices continue to remain strong and the demand is likely to sustain in the current year on the back of demand from countries like China.

  • Domestic impetus:  A robust housing sector, with growth potential in the auto and the consumer durables sector is likely to be a big positive for the steel sector.

  • Cost advantage:  Indian steel producers are one of the lowest cost producers in the world. With exports on the rise leading to better realisations, the bottomline of the companies is likely to be positively impacted.

    Key Negatives
  • The Chine threat:  A key threat to the steel sector continues to be from the consumption pattern of China, which is amongst the largest global consumers of steel. With internal capacities on the rise in the country, going forward, it is likely to meet its demand internally. In fact, as per reports, the country's exports of steel exceeded its imports in the closing months of 2004.

  • Demand-supply scenario:  With global steel capacity on the rise, the impact of which is likely to be felt sooner than later, any falter on the demand front could lead to pressure on steel prices. It must be noted 2004 saw mixed economic growth signals emanating from developed economies, which needs to be kept in mind.

  • High input costs:  Further, even if steel prices continue to rule firm in the near-term on the back of high input costs, the impact on margins is likely to be muted.

  • Waning tariff protection:  Over the years, import duties have been consistently brought down and the steel industry has been increasingly exposed to international competition. Just to put things in perspective, the import duties on various steel products have come down from as high as 80% to the current 15%-20%. The reduction in import duties reduces the net tariff protection for steel producers.

    Budget Impact: Steel Sector Analysis for 2004-05 | Steel Sector Analysis for 2006-07
    Latest: Performance Of Steel Stocks | Steel Sector Report

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