India vulnerable to dumping of steel items despite lower basic production cost

A World Steel Dynamics report says the sector is reeling from cheap imports and high inventory levels

A World Steel Dynamics report has put India ahead of most countries, except the CIS, on the cost curve. Yet the sector is reeling from cheap imports and high inventory levels, to the effect that the government recently imposed a 20 per cent safeguard duty on hot rolled coils for 200 days.

According to the January 2015 WSD data, the cost of production of hot rolled coils for India is $349 (or Rs 22,336) a tonne, compared to $428 in China, $429 in South Korea, $448 in Japan against a global average of $418; CIS, however, is at $305 a tonne. These figures are just the production cost. Add to it, taxes, freight and finance cost, and the picture is not so rosy for the home steel-makers, claim producers.

For hot rolled coils, ex-plant price would be Rs 27,000 a tonne while the cost to consumer which includes freight and taxes would be Rs 32,000 a tonne. This huge cost push not part of the basic production cost increases India's vulnerability which producers in countries like China are taking benefits to dump their produce in Indian markets.

"Our internal freight is 2-3 times higher compared to China," Institute for Steel Development and Growth (INSDAG) director general, Sushim Banerjee, says.

For instance, logistics cost from Vijaynagar to Delhi would be $60, for the same distance in China, a producer would be paying $18, says JSW Steel's director - commercial and marketing, Jayant Acharya.

Tata Steel's former managing director, J J Irani points out: "Most of the modern steel plants are shore-based as the cost of transporting ore in larger and larger carriers is much cheaper than hauling it over land in trains or in dumpers. Korean and Japanese plants are all shore based and they have no captive ore."
 

January 2015 World Cost Curve Comparison for HRC (P&0)

Brazil - $360

China - $428

CIS - $305

Western Europe - $ 453

India - $349

Japan - $448

South Korea - $429

Latin America - $367

Middle East - $410

USA Integrated - $516

USA Mini - $531

Global Average - $418

Then there is the cost of capital. "Most of the Chinese mills are state-owned that avail of loans at one to two per cent compared to a market rate of 4.6 per cent. Our market rate, on the other hand, is 10-12 per cent," Banerjee explained. No wonder, China is selling $80 a tonne below its marginal cost because it can afford to take that hit. Japan and South Korea, on other hand, are selling $150-160 below domestic price to push volumes.

Steel imports have increased primarily from China, Korea and Japan and after much lobbying a safeguard duty has been imposed by the government on hot rolled coils. While that may be the latest of the government's initiatives to protect the industry, over the past few months, there have been two rounds of import duty hike.

Steel producers however argue that it was hardly of significance given that it had no bearing on the countries with which India has free trade agreements like South Korea and Japan.

While the imposition of import duty applies to China, it does not apply to Korea and Japan, with which India has bilateral free trade pacts. "The rate of duty with South Korea is 0.85 per cent. From January, it will be nil," Banerjee says.

According to India Ratings and Research, India's import of iron and steel rose 58 per cent during April-June 2015, making it the country's sixth largest import during this period. The sector's contribution to stressed advances stood at 10.2 per cent of the total advances at end-December 2014 and is among the top five sectors with stressed loans in the system.

But the industry has unanimously welcomed the 20 per cent safeguard duty on imported steel, which may prompt domestic steel producers to revisit prices, if not this month, then the next; it may even shore up volumes in an industry that has been operating at 75-80 per cent utilisation for the last five years. That's also because in the last five years, around 30 million tonnes of capacity has been added, and it outstrips demand, by far.