Export levy likely to push steel companies to review expansion plans

The export levy imposed on steel by the government on Saturday may prompt steel companies to review massive capacity expansion plans.

Major private sector steel producers said that the capacity expansion plans were based on assumptions in the sales mix – between domestic and export markets – which has now gone haywire.

Seshagiri Rao, joint managing director and group chief financial officer, JSW Steel, said: “If exports of 18 million tonnes (mt) become uncompetitive and the domestic market cannot absorb those additional quantities, the industry has to shut down capacities.”

“Hence a serious review of expansion plans by each company in the industry is imminent,” he said.

In FY22, Rao explained, India’s steel consumption was 105 mt and the exports were 18 mt and the industry was operating at a healthy capacity utilisation of over 80 per cent. 

“Accordingly, the industry announced large expansion plans to create capacity both for local and global requirements,” Rao pointed out.

Other top private steel producers also said that a “rethink” was on the cards.

A major steel producer said that it was still studying the full impact of the move but it would certainly impact the capacity expansion of the industry as export markets will no longer be an attractive option if domestic demand slows.

“The impact would be massive. Investments are planned based on how much is going to be sold in the domestic market and how much outside. That may have to be reworked and investments put on hold,” said another major producer.

Jindal Steel & Power (JSPL) managing director V R Sharma said that it would discourage new investments.

“The entire country was working on a formula that we will be exporting and replenishing the supply gap from Russia and Ukraine to Europe and other countries. That was keeping ports and railways busy and the shipping industry was doing extremely well. But now there may be second thoughts on expansion,” said Sharma.

Integrated steel producers in India account for close to 60 per cent of the production of which private sector producers are a major chunk. And they have lined up huge expansion plans.

JSPL plans to take capacity at Angul in Odisha to 25.2 mt by 2030 and Tata Steel is eyeing 40 mt capacity by FY30.

ArcelorMittal Nippon Steel India (AM/NS India) has medium-term plans to expand capacity at Hazira (Gujarat) to 14 mt and then 18 mt. It has also signed a memorandum of understanding with the government of Odisha for a 12 mt integrated steel plant.

Ashima Tyagi, senior editor, S&P Global Commodity Insights, said, with the duty being levied, an excess capacity situation may arise in the medium term unless domestic demand props up immensely or the duties are rolled back.

“Ostensibly, the rate of capacity expansion will be slowed down and India may miss the opportunity to cater to the world demand,” Tyagi said.

ICRA senior vice president, Jayanta Roy, pointed out that the 15 per cent export duty in steel will adversely impact India’s competitive position in steel exports.

“India’s steel export was over 10 per cent last year. Lower exports this year can create a supply overhang and resultant price correction in the country, unless domestic demand growth starts picking up,” he said.

The move also comes at a time when the market has softened. Steel prices corrected in May from all-time highs in April.

The export levy has also caused short-term worries for the industry.  “What about the existing export orders which are already in the pipeline? The government should have given at least two months to steelmakers to adjust accordingly,” said a producer.

The government move to reduce import duty on raw material and impose export levy on iron ore and certain steel intermediates was aimed at bringing down the cost of production and improving availability of steel in the domestic market.

Speaking about steel prices, Sharma said if iron ore prices drop, then it can be passed on to the customers. But coking coal prices can be reduced when the government speaks to Russia and facilitates rupee-ruble trade.