Fighting the import menace

Narendra Singh Tomar's office is abuzz with activity these days. The gamut of visitors who have sought the attention of the Union Minister of Steel and Mines in the past month includes industrialists such as Essar Group CEO Prashant Ruia, JSW Steel Chairman Sajjan Jindal, and Tata Steel Managing Director T.V. Narendran. Even Nirmala Sitharaman, Minister of State for Commerce and Industry, walked across the few blocks that separate her ministry from Tomar's in Udyog Bhavan, to meet him.

In an unregulated sector like steel, this kind of frenetic activity is far from usual. The only other time when a Union steel minister was this busy was a decade ago when Ram Vilas Paswan headed the ministry. At that time, global giants like Posco and ArcelorMittal were making a beeline to invest in India, because with its low per capita consumption of steel and ambition to become the fastest-growing economy in the world, the country's steel market was an obvious attraction.

Only this time, the context is starkly different.

In 2015, India emerged as the only market world over that was witnessing growth in demand for steel. But that is not the reason for Tomar's busy schedule. An unprecedented surge in imports from China, Korea and Japan is threatening not only the profitability but even the viability of many players in the domestic market.

Import of the commodity in India grew by a staggering 71 per cent last fiscal and has continued unabated in the first half of the current financial year. Imports are up 31.2 per cent now, and at 7.45 million tonne, it has already exceeded the full year 2013/14 tally. This fiscal, imports are slated to touch 15 million tonne, crossing double digits for the first time ever. In the process, imports would account for around 15 per cent of the steel consumed in the country.

The primary reason for the surge is overcapacity in the global industry - estimated at about 25 per cent. Around half of that is from China, the world's biggest steel producer with a share of almost 50 per cent of global production. Even as countries are scrambling to cut production and manage inventories to minimise losses, India has become a target to park some of their excess production. Reason: it is the only country in the top 10 major steel markets to post a growth in production of 2.8 per cent in the first 11 months of 2015, and is seeing domestic steel demand growing at a higher clip of around 4-5 per cent (Platts estimates).

Not surprisingly, China accounts for the bulk of steel imported into India - 28 per cent. More worryingly, in fiscal 2014/15, imports from China jumped a mind-boggling 232 per cent. Japan and Korea, with whom India has free trade agreements, account for another 48 per cent (see Surging Imports). Together, the three Asian economies are exploiting the need for steel in India. Their gains, however, have come at the cost of the domestic industry.

Seshagiri Rao,Joint Managing Director and Group CFO,JSW Steel(Photo: Rachit Goswami)

The Price Shock

The overcapacity in the global steel industry has, as expected, led to a steep decline in prices. From the pre-global recession highs of 2008/09, when a tonne of hot-rolled coil was being imported at the docks in Mumbai at $744, prices crashed to below $300 in 2015 - a 12-year low. This has brought down prices in the domestic market as well. A tonne of hot-rolled coil today costs between Rs 27,500 and Rs 28,000 in the domestic market against Rs 37,200 in November 2014, a drop of over 23 per cent. Even then, there is a huge gap in prices of around Rs 19,000 between steel produced in India and the imported variety. Allegations are flying thick and fast that China and Korea are dumping steel in the country by pricing it lower than their own production cost.

"We are aware of the problems and are worried about it," says Tomar. "China's dumping is a big reason. We are considering how to protect the domestic industry from getting impacted by this dumping." Tomar adds that he has met Finance Minister Arun Jaitley and Sitharaman over this issue. "Principally, everybody is agreeable to protecting the domestic industry, but at the same time, the forward course of action will depend on the merit of laws, customs, procedures and arguments."

Already, the government has increased import duty on steel twice in 2015. Last June, the finance minister hiked duty on flat steel products used in the manufacture of automobiles and consumer durables to 10 per cent from 7.5 per cent, and on long steel products used in construction and infrastructure development to 7.5 per cent from 5.5 per cent. He followed it up with another round of hike on import of non-alloy flat products to 12.5 per cent in August 2015 from 10 per cent earlier, while duties were hiked in some of the other categories at the same time. Additionally, an anti-dumping duty of $316 per tonne on import of certain products - such as industrial grade stainless steel - from China, Malaysia and Korea was implemented in August. Further, to circumvent India's foreign trade agreements with Japan and Korea, a safeguard duty of 20 per cent on steel imported from the two countries along with China was imposed for a period of 200 days in September. More recently, in December, anti-dumping duty ranging between five and 57 per cent was imposed for cold-rolled flat products of stainless steel for five years on China, South Korea, US, South Africa, Taiwan, Thailand and EU.

Yet, these measures have had little impact on imports as global prices have continued to fall. The glut-like situation has only worsened. At the time of investigation of the safeguard duty, for example, hot-rolled coil from China was being imported at $370, but by the time it was imposed, prices had fallen to $320, almost negating the entire benefit. They have fallen below $300 now. According to the government's own admission, the stress in the sector may continue for another 18 months if there is no improvement in the global scenario.

"Initially, there was some impact (of safeguard duties)," says Tomar. "But the stress is still intense. In my view, the way those countries are behaving, they can continue for another year to year and a half. Capacity utilisation in the domestic industry has come down, and because we are in a slowdown, it has impacted every company, big or small."

That much time may be disastrous. Already, imports and the resultant impact on domestic prices have taken a toll on the performance of domestic players. India's largest steelmaker, Steel Authority of India (SAIL), saw its quarterly loss widen from Rs 321.64 crore in April-June 2015 to Rs 1,055.96 crore in July-September. It had posted a net profit of Rs 2,092.68 crore in the first half of the previous fiscal. Tata Steel, in fact, had to undertake strategic stake sales in two group companies - Tata Motors and Titan Industries - in the second quarter that generated Rs 1,887.45 crore, to project a healthy balance sheet.

"China, Japan and Korea have resorted to predatory pricing for exports to India, selling steel at much lower prices than in their domestic markets or even their cost of production," says Sanak Mishra, Secretary General of the Indian Steel Association. "The strategy is simply to kill the domestic industry here so that India, the only market where demand for steel will grow in the next 50 years, remains dependent on imported steel in future."

The Debt Burden

Indian steel companies are also overleveraged and burdened with debt. A Credit Suisse report says the five top primary and secondary steel makers in the country - Tata, Jindal, Essar, Bhushan and JSW - have accumulated debt of around Rs 2,50,000 crore. With cash flow drying up, servicing these debts is a big worry. "As much as 37 per cent of India Inc's borrowings are held by companies, led by steel firms, that are not generating enough revenues to service their interest expenses - or stressed assets," the report says. "Further, banks' exposures to stressed steel companies are at 10-30 per cent of net worth." Similarly, the Reserve Bank of India's Financial Stability Report back in June last year itself had highlighted the distress in the sector. "Five out of top 10 private steel producing companies are under severe stress on account of delayed implementation of their projects due to land acquisition and environmental clearances among other factors," the report had said.

As a thumb rule, domestic companies incur losses at prices below Rs 28,000 per tonne. But today, imported steel prices are at much lower levels. Though Indian companies benefit from abundant supply of iron ore - a key raw material in steel making - freight cost in India is one of the highest in the world. At the same time, taxation on mining in India and statutory levies, including royalty in the sector, are also among the highest globally. According to estimates by Indian Steel Alliance, domestic steel companies suffer a price disadvantage of $100 per tonne (Rs 6,600) due to higher taxes and interest costs compared to peers in countries such as China, Brazil, Japan or Korea.

"Globally, fixed costs, including taxes on steel, come to $7-8 per tonne, but for Indian companies, it comes to about $41 a tonne," says Seshagiri Rao, Joint Managing Director and Group CFO of JSW Steel, the country's largest private sector steel-maker. "Interest rates here are much higher at around 10-11 per cent, while in China, South Korea and Japan, they are far lower. There is no level-playing field for domestic steel producers and, certainly, domestic steel players need protection."

The government is fast running out of options. Another round of safeguard duty is in the offing and anti-dumping duties for specific countries may also be levied. However, estimates suggest the global industry is burdened with massive excess capacity of around 550 million tonnes (25 per cent of global capacity). The biggest overcapacity of 250-300 million tonnes exists in China alone.

According to a survey done by Platts, a leading global energy, petrochemicals and metals information provider, the boom years have seen China build up crude steel production capacity of some 1.1 billion MT per year, of which only 73 per cent is being used currently. "Last year, China's steel consumption fell 3.4 per cent year-on-year, its first reversal in three decades. World Steel Association has forecast China's steel consumption will fall 3.5 per cent this year and by a further two per cent in 2016. The country's steel production in 2015 appears on track to fall one-two per cent on last year. Even BHP has scaled back its outlook for China's steel output to 935 million - 985 million MT by the middle of next decade from one billion MT previously. Rio insists Chinese output will still creep up by around one per cent a year to reach one billion MT by 2030," the survey states.

The uncertainty in the world's largest steel producing country only means increased volatility in global steel prices in 2016. As such, nobody can say for sure when steel prices will stabilise domestically. The Indian government is now looking at levying a minimum import price of around $450 (Rs 30,000) per tonne for the sector. Such a move, however, would be untenable under World Trade Organization rules of fair trade, and India would be vulnerable to arbitration by any of the exporting countries.

Sanak Mishra, Secretary General, Indian Steel Association

"A minimum import price would still be a good step as it would provide immediate relief to the domestic industry," says a senior official in a top Indian steel company. "China and Korea cannot sustain this price in the long term but by keeping it this low, they want to kill the domestic industry here. The WTO hearings can be tedious and take a lot of time, and that is what we want."

Till such time a permanent solution is thrashed out, Indian companies would need all the steel within to ride out this storm.