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Ind-Ra: US Import Duty on Steel and Aluminium May Indirectly Affect Domestic Companies

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The hike in import duty on (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 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 plans of Indian players. India's of aluminium to the US increased by around 2x between 2015-2017 during January-October, while exports to US remained flat despite 40% growth in the overall exports by

Excess Production to Impact Prices and Push Back Recovery: Canada, Brazil, Russia, and contribute majorly to US imports of and aluminium. Due to the higher import duty in US, these countries (except and which are exempt) may diversify into other importing geographies. Hence, there would be around 6.4 million metric tonnes of 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 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 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 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 exporting countries to the US start dumping into India, one of the largest 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 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, has become a net exporter of 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. primarily exports to Italy, the UAE and South East Asian countries. With markets becoming more competitive, domestic companies may not only lose their market share in the exporting regions but also see the value declining due to lower global prices of and aluminium.

Volatility in Input Prices to Dampen Growth Prospects: The input prices (especially coking coal) for 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 players. Subsequently, an expectation of lower operating profitability and cash flows will delay the plans of companies (FY17: 9.7x). It may also lead to increased haircuts for 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 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 and non-ferrous sectors; however, depending on the contours of the import tariffs, the outlook may warrant a revision.

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(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Tue, March 13 2018. 13:11 IST