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Budget 2007-08: 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 is currently the eighth largest steel-producing nation in the world with crude steel production of approx. 39 MT. However, it has a per capita consumption of steel of around 33 kgs as against 242 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 fully exempted.

  • The customs duty on primary steel and ferro-alloys stainless steel has been reduced from 7.5% to 5 %.

  • The duty on seconds and defectives of steel reduced from 20% to 10%.

  • Export duty has been imposed on iron ores and concentrates at Rs 300 per tonne and on chrome ore and concentrates at Rs 2,000 per tonne.

  • Dividend distribution tax to be hiked from 12.5% to 15%.


    Budget Impact

  • With a view to reduce the cost of manufacturing, government has fully exempted duty on coking coal.

  • The reduction in customs duties on certain forms of steel will exert pressure on steel companies. However, the effect of this would be more prominent in times of cyclical downturns. In medium term, steel prices expected to remain firm on account of robust demand.

  • On the other hand, reduction in duty on seconds and defectives steel will reduce pressure on key raw material such as iron ore.

  • In order to conserve natural resources and keep a check on raw material exports, export duty has been imposed on ores and concentrates.


    Sector Outlook

  • Increased spending on infrastructure and governments initiatives on housing sector are the key positives for the steel sector, as these are key demand drivers for steel. Going forward, we remain apprehensive about the continuation of the strong performance by domestic steel companies. Though we believe that volume growth would be visible in the years to come, largely due to the continuation of infrastructure spending (including housing), strong demand from the auto sector, which could help in driving demand for value added steel products like CR (cold roll) steel and exports, we expect realisations to come under pressure on account of excessive supplies. From a long-term standpoint, the demand in India is not sufficient to absorb the increased supply and hence for an improved and consistent demand supply equation, India needs to ramp up its exports.


    Company Impact

  • Major steel producers like Tata Steel who own captive coalmines will not be impacted by the reduction in coking coal duty.

  • However, the move is positive from the point of view of companies like SAIL (who partially imports coking coal), JSW Steel who import coking coal.


    Industry Wish List

  • Reduction in excise duty on steel used in infrastructure projects and small auto manufacturing.

  • Need to have a macro policy framework required to meet the National Steel Policy's ambitious plans.

  • Extend the fiscal incentives available for infrastructure projects to steel as steel being one of the six sectors of index of Industrial production for infrastructure.

  • Allocate captive mines of iron ore and coal on priority basis.

  • Need to activate expeditiously or introduce new mechanisms to check dumping of steel at prices below the cost of production.

  • Minimise the cost of transportation that is imperative for the industry to maintain its competitive edge in global and domestic markets.

  • Need to strengthen infrastructure especially railways and roadways and also provide infrastructural support at concessional rates.


    Budget over the years

    Budget 2004-05 Budget 2005-06 Budget 2006-07

    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 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

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

    The budget is silent on the restoration of the duty entitlement pass book (DEPB) scheme applicable to steel exporters.

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

    Customs duty on ferro alloys, stainless steel and other alloy steel has been reduced from 10% to 7.5%

    [Read more on Budget 2004-05] [Read more on Budget 2005-06] [Read more on Budget 2006-07]

    Key Positives
  • Growth potential: The per capita consumption of steel is around 33 kgs in India as against 242 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.

  • Continued demand: Strengthening of steel prices since 2003 till early 2006 helped the domestic steel companies immensely as many of them managed to reduce their debt burden considerably. Going forward, the demand for the metal is likely to sustain on the back of continuing demand within India and from the US and other South East Asian nations.

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

  • India advantage: Indian steel producers are one of the lowest cost producers in the world, which provides them with a hedge against fall in prices. Further, relatively efficient and vertically integrated companies like Tata Steel are likely to be in a better position to weather any steel downturn.

    Key Negatives
  • Fragmented industry: While there have been concerted efforts to control the fragmented nature of the industry through consolidation and closures, the problem continues to persist. Further, the biggest threat to the industry remains from the cyclicality of the sector, which could put immense pressure on steel prices if steel consumption shows signs of faltering or supply exceeds the demand considerably.

  • Capped benefits:  Indian steel companies have to bear additional costs pertaining to capital equipment, power and inefficiencies (low per employee productivity). This has capped the edge they would have otherwise enjoyed due to availability of cheap labour and raw materials.

  • Import threat: Another possible threat to the domestic steel sector continues to be from dumping by international companies. With wide spread capacity expansions taking place across the globe and the protection to domestic steel companies being progressively reduced with consistent reduction in custom duties, international steel companies might look at markets to dump their products. In such a scenario, Indian companies stand to lose due to lack of competition in terms of size, which now they are scaling up.

  • Volatile prices: Chinese exports have flooded world markets, driving down prices. The Chinese steel industry is destabilizing the market through a dramatic expansion in capacity fuelled largely by subsidies and government-directed lending. The continuous warnings given by the EU and US government to China are a clear indication of rising Chinese imports into these nations. Though the steel prices are expected to remain firm on account of strong demand within domestic market and industry witnessing consolidation, the impact of Chinese exports is hard to predict, leading to considerable uncertainty on the pricing front.

    Budget Impact: Steel Sector Analysis for 2006-07 | Steel Sector Analysis for 2008
    Latest:  Performance Of Steel Stocks |  Steel Sector Report

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