Steel: Hit by excise duty hike

The budget announcements are a negative for the steel sector, as the increase in the excise duty by 4% to 12% will adversely affect the bottomline, at least in the short term.

We continue to maintain our bearish view on the steel sector for the medium-term owing to various reasons. We believe that the steel cycle has peaked and with various domestic and global capacity expansions plans taking shape coupled with the Chinese governments efforts at cooling down its economy, this would put pressure on steel prices going forward. Indian steel majors have already announced aggressive capacity expansion plans in India. This means that any shortfall in the demand from China will lead to overcapacity in the Indian context. While steel demand in India is expected to grow in the region of 4% to 5% in the near future, it may not be able to absorb the capacity additions expected in the future.

Tisco - Mr. Nandrajog (VP - Finance)
(excerpts from a detailed pre-budget wish-list provided by the company)

Export benefits: DEPB benefit on exports should be restated. Further, Export promotion for Capital Goods (EPCG) Scheme is an incentive for exporters. The system need to be simplified on similar lines as DEPB Scheme. It will help faster processing of documents and release of goods at the Ports.

Value Added Tax (VAT): Implementation of "Value Added Tax" (VAT) with corresponding reduction in Central Sales Tax (CST), as envisaged in the proposal, needs priority. This will also mean abolition of Entry Tax (4% - 5% on designated input materials) which many states, including Jharkhand, have imposed.

Reduction in Railway Freight: Inspite of good quality of limestone available in the Country especially Rajasthan, the landed cost of limestone become uneconomical compared to the imported ones. This is mainly due to very high railway freight (almost 300% of the cost of material) paid for the rail movement. This makes the entire deal uneconomical. We therefore, seek support of Indian Railways and assistance from Ministry of Steel, to cut down the railway freight to make the indigenous limestone economically attractive.

Tariff protection: In view of the high infrastructure costs and high interest rates, tariffs have to be commensurate, to make the Indian steel industry competitive. Tariffs need to be in place so long as infrastructure development remains inadequate in the country. It may be noted that countries, which have reduced tariffs, have alongside provided safeguards

Steel purchased for Gujarat relief work to be exempt from Excise duty.

Higher outlay on infrastructure projects.

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%.

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%.

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 the developed countries. This wide gap in relative steel consumption indicates that the potential ahead for India to raise its steel consumption is high.

Meteoric rise in steel prices during 2003 helped the domestic steel companies immensely as many of them managed to reduce their debt burden considerably, helping them either turn into profits or increase the same significantly. Going forward, the demand is likely to sustain in the current year also on the back of continuing demand from countries like China and improving growth prospects of US and Japan.

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.

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

While there have been concerted efforts to reduce the overcapacity constraints in the industry, the problem continues to persist, albeit lesser than a year or two ago. Further, the biggest threat to the industry remains from the cyclicality of the sector, which could put immense pressure on steel prices if steel demand/consumption shows signs of faltering.

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.

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