Alloy Steel: Abolition of customs duty on raw materials sought in Budget 2013-14

Alloy steel, a value added product, is a vitally important segment of the Indian steel industry, even though it constitutes only about 8% of the production of the total steel in India. Alloy steels are specifically produced for use in sophisticated engineering products for various critical applications such as machined components, engine parts, steering components and bearings and the like for the automobile industry as also for engineering and defense areas.

Though the entire steel industry in India is in the throws of a slowdown, impacted as it is due to the global downswing, the situation is particularly grim in the alloy steel sector due to overcapacity and reduced demand. The situation has further worsened due to a surge in imports of alloy steel in recent times. Just to cite some figures: During the period April-December , 2012 the import of alloy steel amounted to 1387,000 tonnes against 1131,000 tonnes in the same period 2011.This means an increase of 23% , and the upward trend is continuing. The strengthening Rupee will give further impetus to imports. Bulk of these alloy steel imports are from Japan and Korea and some from China. With Korea and Japan our country has entered into “Comprehensive Economic Partnership Agreements (CEPA)” which allow these countries to export steel products at just about 3% basic import duty. Obviously, these CEPAs are hurting the Indian steel industry and need a rethink on part of the government.

Alloy steel sector has an installed capacity of approx. 11 million tones out of about 80 million tones for the entire steel industry in the country. At approx. 5 million tonne production against 11 million tonne capacity, the utilization in the sector is below 50% as against 85% capacity utilization for the entire steel industry. Coupled with the threats from surging imports, the alloy steel sector is really in a situation of severe distress and needs some immediate relief. Most of the companies in the alloy steel sector are either incurring substantial losses or are showing inconsequential profits.

The Union government has raised the basic import duty on flat products from 5% to 7.5% first in the Budget 2012-13 on carbon steel and subsequently on flat products of alloy steel. In this backdrop, the case for alloy steel long products of the alloy steel sector is stronger in view of the earlier scheme of things when the tariff on alloy steel was 10% against 7.5% on merchant or mild steel.

The nickel required for producing Alloy / Stainless steels is not available indigenously. In the last Union Budget (2012-13) the government abolished import duty on stainless steel scrap in which Nickel is used as raw material. The most common stainless steels contain 8-10% nickel, 18% chromium and balance iron. The present custom duty on all three categories of nickels viz Unwrought Nickel, Nickel Oxide and Ferro Nickel is 2.5%.

Proposals given by Alloy steel producers association of India:

Alloy steel producer’s association– representing alloy and stain less steel (long products) sector of the steel industry recommends the following proposals for the Budget 2013-14

• Request for Enhancement of Import Duty on Alloy Steel Long Products from the existing 5% to 10%.
• Abolition of customs duty on raw materials, viz. Nickel, for production of steel.

Stocks To Watch: Adhunik Metaliks, Bhushan Power & Steel, Jai Balaji Industries, Jindal steel, Jayaswal Neco, Mukand steel.

Analyst Expectations

We expect that government would increase the import duty on alloy steel long products from the existing 5% to 10%. With this, the imports of alloy steel long products are likely to be reduced and surplus domestic production capacity to be utilized and thereby improve the performance of the sector.

Outlook:

Increase in import duty of alloy steel long products from 5% to 10% will reduce the imports and the demand for domestic alloy steel increases which will lead to increase in the surplus domestic production & capacity utilization. On the other hand, the alloy steel production is expected to become more competitive in the Country with the reduction in custom duty on all three categories of Nickel from 2.5% to Nil. On overall, the alloy steel sector is likely to witness an improvement in the margins with the improved production capacity utilization and reduced costs.

On demand front, the total alloy steel demand is expected to see some positive signs from auto sector on second time easing of monitory policy by RBI through cutting the CRR ratio by 25 bps from 4.5% to 4.25%. Moreover, the various upcoming transportation and infrastructure projects is expected to drive stain less steel demand to grow at a CAGR of around 8.1% between FY2011-FY2013.  Further, the existing capacity of primary producers and down stream processors and fabricators has to be multiplied in order to cater to the rising demand and export demand of stain less steel in India over 7 million tonnes in 2015-16. 

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