A new export tax mechanism has put the steel sector in a piquant situation. In May, the government came out with a 15% export duty on finished steel products to curb the exports and increase domestic supply to the manufacturing sector at competitive prices. Steel manufacturers were also given relief to increase the domestic availability of iron ore at low prices by imposing 50% export duty, earlier it was 30% and the removal of 2.5%-5% import duty on coking coal and met coke respectively.
The relief measures are being appreciated but may not sustain long and the real purpose may be defeated because the government has left the little value added iron ore-turned into semi-finished steel out of the ambit of export duty. This loophole may inevitable supply shortage and price rise of steel again in the domestic market.
Taking the benefit of the lacuna left, the Indian steel giants now turn to expand their export opportunities in semi-finished goods like ingots, billets and slabs because 95% of India’s finished steel export basket has been affected by 15% export duties, which was earlier was nil. To fill this export gap, duty-free semi-finished steel export volume can touch 10-12 million tonnes (MT) in FY 22-23, which may surpass war-torn Russia and Ukraine, which were the world’s largest exporters of 12 million tonnes of semi-finished steel last year. An Indian rating agency has anticipated that the export of semi-furnished, which declined by 26% year-on-year (YoY) in 2021 to 4.96 million tonnes, is likely to witness a significant growth in the current fiscal year.
The loophole may cause instability again in domestic steel market prices and will likely pull back India’s fragile manufacturing sector recovery. The government must consider levying export duty on semi-finished steel products as well. At the same time, the import of second-grade steel should be restored for a level-playing field.
In 2011, the government banned the import of second-grade steel. The decision was premised on the argument that the import of low-quality steel spoils the quality of the final products. However, the government data did not specify a quality level and must leave the quality decision to the buyers in the market. In an open market economy, it is purely the prerogative of buyers to decide which products they wish to buy. So, the issue is to be tuned to market realities.
IMPACT OF TAXATION CHANGES
The export market for iron ores suddenly hedged around 20% after slapping a 50% export duty on iron ores. The country’s largest iron ore miner and seller National Mineral Development Corporation (NMDC) has made a sharp reduction of prices around Rs 1,100 per tonne and now the price of lump ore is Rs 5,500 per tonne compared with Rs 6,600 per tonne in May. A reduction in iron ores prices in the domestic market will also fuel the export of semi-finished steel.
For major steel manufacturers, importing coke is more cost-effective today. The cost analysis of market intelligence agency CoalMint reveals that the removal of 2.5% import duty on coking coal will result in a cost-saving of around Rs 1,100 per tonne and, on met coke, imports duty of 5% removal attracts the saving of around Rs 2,400 per tonne. Thus, the direct impact of changes in taxation is around Rs 3,500 per tonne reduction in the production of semi-finished steel from iron ore. The semi-finished steel-ingots, billets and slabs production costs in India are reduced by 10%, which now stand at around Rs 43,000 per tonne or $525-$550 per tonne in comparison to $625 per tonne in China and Japan whereas the global average is around $575 per tonne.
INDEPENDENT REGULATOR NEEDED
Since steel is a deregulated sector, there is a need for an independent regulator for effective regulation, which the sector presently lacks. There is a need for a new and dynamic steel policy also.
Moreover, there is a need to examine the entire value chain associated with the steel industry, right from the iron ores to the production of finished products to find out the exact bottlenecks in the sector. An ecosystem has to be created that ensures the profitability of every player associated with the downline industries. Simultaneously, it needs to be checked that none of these makes windfall gains at the expense of others. We have to strive towards it to make the entire manufacturing sector profitable either through direct government interventions or independent regulators.
WAY FORWARD
Changes in export taxation are the right steps taken by the government to boost manufacturing, infrastructure and construction but keeping the semi-finished steel out of the ambit of export duties may defeat the purpose. There are five to six Indian steel giants, which are now exploring to enhance the export volume of semi-steel, and already enjoy inherent advantages in terms of abundant availability of captive iron ore mines at cheap prices and lowest production cost compared to global average cost.
All hope is that the government will not only keep in mind the interests of steel sectoral giants at the cost of 6.4 crore MSMEs, who are the key associates of the manufacturing sector. With a holistic approach, the government can intervene to clamp down on semi-finished steel also by imposing export duty and allowing the import of secondary steel to maintain the competitiveness and growth of the country’s manufacturing sector.
The writer is Vice Chairman, Sonalika Group and Former Vice Chairman, Punjab Planning Board. The views expressed in this article are those of the author and do not represent the stand of this publication.
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