Antidumping duty to boost local steel producers’ profits

22 May 2017

Indian steel producers’ demand and profit outlooks will improve on the back of protective measures such as definitive antidumping duties on several flat steel products and preferential procurement of domestic steel by the government, global ratings agency Fitch Ratings has said. However, aggressive capacity expansion presents a risk to credit profiles which are yet to recover fully from debt-funded capital expenditure over the last few years, it said.

The government had on Friday imposed antidumping duties on some steel products including hot-rolled flat products originating in or exported from some countries including China, Japan and South Korea, for five years from August last year.

Tata Steel and JSW Steel, in particular, are well placed to benefit from this since around 75% of their capacity is for production of flat products, which have constituted the bulk of Indian steel imports over the last few years, the Fitch report said.Hot-rolled and cold-rolled products on which antidumping duties have been imposed formed over 55% of India’s finished steel imports between April 2015 and December 2016, it said.

Antidumping duties will result in a minimum cost (including the antidumping duty) of $489/tonne for hot-rolled coils, $561/tonne for HR plates, and $576/tonne for CR coils imported from these countries.

The duties are in place until August 2021, and provide long-term protection for the Indian steel mills.

Fitch said the antidumping duties could help reduce risks to selling prices and brighten the outlook for profitability for Indian players amid a global overcapacity situation.

International steel prices have been volatile with China domestic spot HRC prices rising to around $550/tonne in early 2017 from around $420/tonne in September 2016, due to a jump in coking coal prices, before coming to $450/tonne this month with the moderation in coking coal prices.However, an input cost-led hike in steel prices to levels above those specified by antidumping duties would expose Indian steelmakers to margin pressure from imports, Fitch said.

Additionally, India’s recent policy move, giving preference to locally processed steel in government projects, which will run parallel to National Steel Policy 2017 that envisages an almost 150% increase in domestic steel capacity in next 15 years, should improve the demand scenario, it said.

In India, nearly 65% of steel is used in infrastructure, construction and railways, driven largely by public-sector investment. Hence, preferential procurement by government, based on a minimum domestic value addition requirement of 15%, improves the demand outlook for manufacturers over the longer term.

The positive outlook, however, remains tempered with near-term issues. Finished steel demand growth in India was relatively weak at 3% in FY17, according to official data. “Faster deman growth will depend on acceleration in public-sector project execution and a recovery in private-sector demand,” Fitch said.

A key risk for credit profiles of steel producers is the plan comprising aggressive capacity addition. NSP 2017 estimates that 300 mt of steel capacity will be needed in India by FY31 (FY16: 122 million tons), requiring an investment of over $150 billion.While risks to profitability are easing, steel companies’ balance sheets remain relatively weak and major investments in capacity additions could result in high leverage metrics over the next two to three years, the Fitch report cautioned.

Source – economictimes ; indiatimes.com