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Honest Truth by Ajit Dayal
Straight from the Hip by J Mulraj

Budget 2008-09: Steel

Government’s increased emphasis on infrastructure coupled with the strong demand from housing and automobile sectors will ensure that the steel consumption reaches a few hundred million tonnes a few decades from now. Infact, if we are to bridge the gap between the domestic per capita consumption of 39 kgs and global average of 150 kgs, then demand will have to grow by atleast 10% to achieve the target by the year 2020. Further, with the supply not in a position to be able to catch up with the demand atleast until few years from now, we could see the continuation of the current robust steel cycle in the medium term. Availability of iron ore, however, may come under threat if the government continues to permit indiscriminate exports of the same. Read more

 Budget Measures

  • Steel melting scrap will be exempt from customs duty
  • Excise duty reduction in select segments of automobile manufacturing
  • Continuation of power sector reforms
  • Coal regulator to be appointed
  • Dividend tax paid by parent company allowed to be set off against the same paid by its subsidiary

     Budget Impact

  • Reduction in customs duty on scrap will help steel manufacturers that use the electric arc furnace route for steel manufacturing lower their costs. On the other hand, it will be a negative for manufacturers that use the blast furnace route.
  • If auto manufacturers pass on the reduced excise benefits in the form of lower prices, it will help spur demand for automobiles, which in turn will drive steel demand
  • Increased investment in the power sector will also help boost demand for steel
  • The proposed coal regulator will help ease the process of allocating coal blocks, a key raw material in the steel manufacturing process

     Company Impact

  • Reduction in excise duties on automobiles will help companies that supply steel to auto makers. Key beneficiary would be Tata Steel
  • Players that supply steel to the power equipment companies like SAIL and JSW Steel will benefit from increased investments in the power sector
  • Better access to coal mines will be a positive for all the players that do not have their own captive mines

     Industry Wishlist

    FICCI's wishlist
  • Ad valorem duty to be imposed on exports of iron ore from the country
  • Removal of customs duty on scrap, iron ore as well as metcoke
  • Reduction of customs duty on zinc as it is the key raw material for production of galvanized sheets and also used majorly for irrigation and water supply related pipes.

     Budget over the years

    Budget 2005-06 Budget 2006-07 Budget 2007-08

    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 was 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%

    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%.

    [Read more on Budget 2005-06] [Read more on Budget 2006-07] [Read more on Budget 2007-08]

    Key Positives
  • Lustrous demand ahead: Amongst all the metals, steel arguably has the highest co-relation with a country GDP growth. Thus, if we expect India’s GDP to grow in the region of 7% to 8% in the foreseeable future, then the consumption of steel has to increase at a proportionate rate. As per industry reports, between 2003 and 2015, the demand for steel is expected to triple, translating into a healthy CAGR in the region of 10%.

  • 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.

  • Improved financial health: The robust steel cycle that started in 2003 has enabled a lot of domestic companies to pare significant amounts of debt and make their balance sheet stronger. Infact, even a lot of new capacities that are being planned will have a healthy mix of debt and equity, thus enabling these companies to weather any downturn in a much better way than managed in the past.

  • Global outlook: Be it acquisition of downstream technology or enhance raw material security, Indian steel companies have started looking outward for augmenting their growth plans, thus highlighting their commitment towards the downstream sectors, which otherwise will have to depend on imports as well as their shareholders. We believe the sector should see many more deals along the lines of Tata Steel’s acquisition of Corus and Jindal Steel and Power’s acquisition of iron ore mines in Bolivia.
    Key Negatives
  • Iron ore availability: Export of iron ore continues unabated from the Indian shores under the misconception that we have abundant reserves. But nothing could be further from the truth. Iron ore availability in India on a per capita basis remains among the lowest in the world and thus if exports are not stopped, we might lose the edge that we have in terms of being self-sufficient in iron ore.

  • Capacity constraints: It is indeed ironical that despite being among the lowest cost producers of steel in the world, India has to export its iron ore and at the same time, become a net importer of steel in recent times. This is because major domestic steel producers are facing capacity constraints and new capacities are not coming up fast enough. Unless capacities come on stream quickly, some of the benefits of robust growth in the industry might be lost.

    Budget Impact: Steel Sector Analysis for 2007-08 | Steel Sector Analysis for 2009
    Latest: Performance Of Steel Stocks | Steel Sector Report

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