No Major Immediate Impact on Steel Industry; Long-term Positive - Ind-Ra

India Ratings & Research (Ind-Ra) expects the Union Budget 2014-15 to provide limited benefit to the steel sector in the next six-nine months. Short-term steel demand, which grew only 0.6% yoy during FY14, is likely to be supported by capex of INR2,479bn in FY15 (up 55% yoy) by public sector undertakings. The increase in custom duty on the import of stainless steel to 7.5% from 5% is expected to benefit stainless steel producers, facing tough competition from imported products.

The government has announced various measures to revive investments in the sector. The proposed conducive tax regime for real estate investment trusts should attract investments in the real estate sector. The budget also proposes to ease the minimum built-up area to 20,000sqm from 50,000sqm as well as the minimum capital for foreign direct investments in the real estate sector to USD5m from USD10m for the development of smart cities. The government plans to develop 100 smart cities, for which INR70.6bn will be provided in FY15. The construction sector accounts for about 60% of the total steel consumed in India. The budget also proposes an investment allowance of 15% to those manufacturing companies which invest over INR250m in new plants and machinery. This should revive demand for the capital goods sector.

The budget stipulates easing of certain provisions of the Mines and Minerals (Development and Regulation) Act Moreover, the investment-linked deduction has now been proposed to be extended to the transportation of iron ore through slurry pipelines. This should also result in attracting investment in iron ore mining.

Steel producers could however be affected by the imposition of a 2.5% custom duty on met coke and an upward revision of royalty rate on minerals. However, the Finance Minister has not quantified the revision percentage yet. Also, a significant rupee appreciation may negatively impact steel producers.

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