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The hike in import duty on steel (25%) and aluminium (10%) by the US is unlikely to immediately impact Indian producers, as exports to the US are low at 2% and 6%, respectively, says India Ratings and Research. However, the impact could percolate through lower international prices due to excess supply from exporting countries while also leading to lower exports. Global price corrections could further delay the deleveraging plans of Indian steel players. India's export of aluminium to the US increased by around 2x between 2015-2017 during January-October, while steel exports to US remained flat despite 40% growth in the overall exports by India.
Excess Production to Impact Prices and Push Back Recovery: Canada, Brazil, Russia, and Korea contribute majorly to US imports of steel and aluminium. Due to the higher import duty in US, these countries (except Canada and Mexico which are exempt) may diversify into other importing geographies. Hence, there would be around 6.4 million metric tonnes of steel and 3.7 million metric tonnes of aluminium available globally, driving down the prices and pressurising domestic realisation.
The move can prove as a deterrent to a gradual recovery especially in the steel industry. An anti-dumping duty is in place, but as the current realisation is well above the duty price point, prices may fall into duty levels. Though Indian steel imports would be restricted to specialised products not manufactured in India, a situation of cheap availability of imports may prove as a double whammy, especially against the backdrop of a growing domestic demand of steel. Alternatively, even if other importing nations set up trade barriers, exports could still be a casualty and capacity utilisation rates could take a hit. However, the effect could be significantly lower in case US tariffs are applicable only to select exporters and retaliatory actions are minimal.
Utilisation Rates Could Dip with Excess Capacity: The utilisation levels of the existing plants could decline, aggravating the problem of oversupply. If these major exporting countries to the US start dumping into India, one of the largest steel consumers, then the situation of oversupply could lead to a decline in the capacity utilisation levels of domestic players.
Additionally, there is room to cater to the US steel demand internally, as the utilisation rates are below 75%. This suggests that at least in the medium to long term, the quantum of imports by the US will diminish gradually as the local demand will be met by capacity ramp-up.
Cascading Effect on Exports Likely: With the global demand recovery in steel, India has become a net exporter of steel over the past few quarters. Besides the marginal impact of the duty hike on domestic companies for having limited exposure to the US, any deterioration in international prices could prove as a collateral damage. India primarily exports steel to Italy, the UAE and South East Asian countries. With export markets becoming more competitive, domestic steel companies may not only lose their market share in the exporting regions but also see the export value declining due to lower global prices of steel and aluminium.
Volatility in Input Prices to Dampen Growth Prospects: The input prices (especially coking coal) for steel have been rising since 2015 (CAGR 6%). In a possible falling price environment for steel, any further increase in input cost will lead to a margin decline for steel players. Subsequently, an expectation of lower operating profitability and cash flows will delay the deleveraging plans of major steel companies (FY17: 9.7x). It may also lead to increased haircuts for stressed steel companies.
Domestic companies run a surplus in aluminium due to the recent addition of capacity and cost-efficient imports. With the onset of import duty, the export market is likely to become more competitive and absorption of surplus production will be a challenge for domestic players. Ind-Ra believes, while input prices may soften due to improving supply side fundamentals, excess capacity will drive down the prices and premiums subsequently.
Ind-Ra has a stable outlook on the steel and non-ferrous sectors; however, depending on the contours of the import tariffs, the outlook may warrant a revision.
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