What is making Indian steel expensive?

Cost of production of hot rolled coils for India is $349 a tonne

A World Steel Dynamics (WSD) report has ranked India ahead of most countries, except those from the Commonwealth of Independent States, in terms of the cost curve. Yet, the sector is reeling from cheap imports and high inventory levels. So much so that the government recently imposed a 20 per cent safeguard duty on hot rolled coils for 200 days.

According to WSD data for January this year, production cost for hot-rolled coils in India was $349 a tonne, compared with $428 in China, $429 in South Korea, $448 in Japan and the global average of $418. For CIS countries, the cost was $305 a tonne (all figures are ex-works). Add to it the taxes, freight and the cost of capital, and the picture isn’t really rosy for domestic steel makers, companies claim.

For hot rolled coils, the ex-plant price is about Rs 27,000 a tonne, while the cost to the consumer, which includes freight and taxes, is Rs 32,000 a tonne. Producers in countries such as China are taking advantage of this huge addition to dump their produce in the Indian market.

“Our internal freight rate is two-three times higher compared to China,” says Sushim Banerjee, director-general of the Institute for Steel Development and Growth.

Logistics costs from Bellary to Delhi would be $60, while for the same distance in China, a producer would pay only $18, says Jayant Acharya, director (commercial and marketing), JSW Steel.

Former Tata Steel former managing director, J J Irani, says, “Most modern steel plants are shore-based, as the cost of transporting ore in large carriers is much cheaper than hauling it in trains or in dumpers. Korean and Japanese plants are all shore-based and have no captive ore.”

 

Capital costs, too, are high. “Most Chinese mills are state-owned and 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 says. It is, therefore, unsurprising that China is selling at $80 a tonne below its marginal cost, as it can afford to take a hit. Japan and South Korea, on other hand, are selling at $150-160 below the domestic price.

Steel imports have increased from China, Korea and Japan. After much lobbying, a safeguard duty has been imposed by the government on hot rolled coils. Also, through the past few months, there have been two rounds of import duty increases.

 

Steel producers, however, argue these are hardly significant steps, as it had no bearing on  countries with which India has free trade agreements, such as 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 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, import of iron and steel rose 58 per cent in April-June, making it India’s sixth-largest import item in that period. The sector’s contribution to stressed advances stood at 10.2 per cent of total advances at the end of December 2014. The sector is among the top five in terms of stressed loans.

The sector has unanimously welcomed the 20 per cent safeguard duty on imported steel, which might prompt domestic steel producers to revisit prices. It might even shore up volumes in a segment that has been operating at 75-80 per cent utilisation for the past five years. That is also because during this period, about 30 million tonnes of capacity has been added, and it outstrips demand.

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