The domestic steel industry is currently reeling under high input costs, dipping domestic demand and rising interest rates. Profitability margins of most Indian steel producers have came under pressure in H1FY12 due to increases in input costs led by a disruption in coking coal supply. Amidst these adverse situations, Comprehensive Economic Partnership Agreement (CEPA), a sort of free trade agreement signed with countries – especially Japan and Korea – is proving to be another impediment for Indian steel producers.
The government has increased the import duty on most steel products from five percent to seven percent in the budget. However, it does not affect the imports from Korea and Japan since, under the provisions of CEPA, the rate is subsidized at 3.125 percent for Korea, while Japan attracts 3.3 percent for 2012-13. The rate will reduce to zero by the beginning of 2017.
This had added to the woes of domestic steel producers as the cheap imports are eating into the profit margins and acting as a severe stress on capacity expansions as well. It will also have an adverse impact on the capital infusion in the steel sector.
Major Indian steel producers have been pointing to the surge in the imports of hot rolled coil (HRC) from Korea (125 percent) and from Japan (72 percent), in 2011-12 over the previous year, to back up their allegations. Even trade bodies like the Federation of Indian Chambers of Commerce and Industry have been apprised of the situation and are said to be tracking the situation.
Surging imports may lead to idling of steel capacity due to onslaught of imports leading to loss of jobs for Indians. Creating steel capacity entails huge investments. There will not be any incentive for Japanese and Korean mills to set up steel plants in India since they get free access to steel market in India and iron ore from India.
Apart from this, the cost structure of steel making in India is not comparable to that of Korea and Japan, since steel plants are older than Indian plants and the cost of finance in those countries are far lower. Indian finance costs are at least five times higher.
To give domestic steel makers a shot in the arm, the government, in November 2011, had imposed anti-dumping duty on flat stainless steel from European Union, South Africa, the US and Taiwan to protect the domestic industry from cheap imports from abroad. The level of duty on the product varied from country-to-country. However, there has been an impending demand from domestic steel producers to impose anti-dumping duty on cold rolled flat stainless steel, which accounts for about 80-85 percent of domestic consumption.
Indian steel mills are cost competitive. They are not averse to steel imports. But, we should guard against dumping of steel. If imports hurt domestic steel industry, it requires course correction. The long term solution would depend on government taking proactive measures on increasing the usage of steel in various infrastructure and consumer durables segments including rail, automotive and white goods.
Also, as the import duty will be reduced to zero in the next few years, there will be no incentive left for foreign players to set shop here. So to ensure that this does not happen and the domestic players get a level playing field, it is imperative to revise duty structures keeping in mind the current scenario.