Business; Steel: Ironed Out for Now

India Today, December 21, 1998
Dec 21, 1998

STEEL
Ironed Out for Now

Anti-dumping measures against cheap imports provide some relief to the industry. But can they stave off the impending glut?

By Priya Ramani

Perhaps it was the aggressive lobbying by the sector that finally paid off. Or maybe the trigger was the Rs 617 crore first-half loss reported by the state-owned sail. Whatever the reason, the steel industry heaved a collective sigh of relief when the Government declared earlier this month that it had finalised an anti-dumping strategy against the imports of hot rolled (hr) steel products from the Commonwealth of Independent States (CIS) countries.

Russia, Kazakhstan and Ukraine have been selling hr steel in India at prices as low as $180 (Rs 7,650) a tonne. The landed cost, which includes import duty and other levies, works out to around Rs 11,500 a tonne, making it far cheaper than local steel which is priced around Rs 13,500 a tonne.

The anti-dumping notification, which targets imports from Russia and Ukraine, has now fixed a floor price of Rs 14,300 a tonne for hr coils, Rs 15,000 a tonne for hr strips, sheets and plates, and Rs 22,000 a tonne for boiler quality plates. The anti-dumping duty will be the difference between the floor price and the landed price of imports, subject to a minimum of Rs 481 a tonne. Analysts say at current price levels, the protection works out to about Rs 2,300 a tonne.

"We hope it will act as a deterrent and make for a level-playing field for domestic producers who have to operate in a globalised market," says Firdose Vandrevala, vice-president (sales & marketing) at TISCO. "The upside of this anti-dumping move in the next few months would be in the range of Rs 500-750 a tonne for companies like TISCO and Essar and Rs 750-1,000 for sail which produces inferior grades that compete head-on with imports from CIS," says Sanjay Jain, analyst at HSBC Securities.

Celebrations had barely begun when more good news trickled in. The Finance Ministry announced that seven inputs used in the manufacture of steel would be exempt from the 5 per cent special customs duty.

Steel manufacturers were quick to respond. A few days after the notification, leading steel companies hiked the prices of some products by Rs 500-800 a tonne. But experts feel that weak global prices and the depressed conditions in consuming sectors like automobiles will ensure that local producers do not hike their prices substantially.

Steel companies -- which have seen their revenues shrink in the past few years due to slack demand and increased competition from cheap imports -- believe this will now change. "It's a good move because India has always been on the defensive on anti-dumping," says Mukesh Gupta, vice-chairman of the Lloyds group.

The anti-dumping duty comes after persistent lobbying by the steel sector. The Government had earlier rejected the demand for such a duty saying there was no causal evidence that the industry had been hit due to cheap imports. Indeed, though the use of imported steel has steadily increased over the years (see chart), import of steel products fell by 15 per cent in the first half of 1998-99.

The problem, it seems, was elsewhere. "It was more the pricing of imports than the quantity of imports that was a problem," says T.N. Giridhar, analyst at Kotak Securities. Local consumers used the cheap CIS import prices as bargaining tools to drive down prices of domestic steel, forcing manufacturers to offer heavy discounts. These rebates may now be reduced or done away with altogether.

The Government's move is also expected to scale down the impending glut in steel products. In flat products, which account for about 50 per cent of total steel consumption, supply was expected to overtake demand by 2.5 million tonnes by March 1999. But this may now be corrected because imports -- no longer cheaper than locally manufactured steel -- will come down from about 10 lakh tonnes to only about two lakh tonnes.

Having tasted blood, the steel industry is pulling out the stops in its battle against imports. Next on the firing line are imports from Japan and South Korea, available at very competitive rates after last year's currency crisis in South-east Asia. South African imports are also on the hit list. The industry plans to file an anti-dumping petition against these countries shortly. In addition, it is furiously lobbying for excise reductions on products like galvanised sheets which are sold mainly to the rural sector.

Analysts say the benefits from the anti-dumping measures may be neutralised by the sluggish 1.5-2 per cent growth in domestic demand, huge capacity additions and imports from other recession-hit economies. "A 13 per cent annual growth in demand would be required through fiscal 2001 to match the new capacities being created if all planned capacities come on stream," says Giridhar. This is a long way from his estimates of a 4-8 per cent growth in demand for flat products during the same period.

To bridge the gap, companies will either have to rely on exports or, more realistically, cut production. But global demand is in the dumps. Exports to South-east Asia, which was the fastest growing steel market in the world and was expected to account for 65 per cent of the increase in global consumption in the coming years, have slowed down after the financial crisis in the region.

Even domestic consumption has come down in recent years. The reduction in government spending in the past few years has also stifled growth in the steel sector. Long products are used mainly in construction and infrastructure projects and the government accounts for more than 30 per cent of the offtake. However, capital expenditure by the government came down from 5.9 per cent of the GDP in 1991-92 to 3.80 per cent in 1997-98. This year it is expected to further dip to 3.70 per cent. "Cheap imports and dumped materials knocked the bottom out of the already depressed markets," says Vandrevala.

In such a gloomy scenario, the anti-dumping duty on imports has boosted the morale of the industry. However, Gupta is not yet ready to uncork the champagne. "Benefits like higher pricing across products to all consumers will start coming in after six to nine months. I will get jubilant then." Everyone is waiting.

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