It has become increasingly difficult to understand what the government actually wants to achieve through various measures taken on the steel sector in the past few months in the context of rising inflation in the country. The government waived import duty on steel, obviously, to make it cheaper to import and bring in more competition in the domestic market. It did also bring in export duty on steel products as also on scrap and sponge iron, if I recall correctly. The list included products, which baffled many, as they were left wondering on the logic and merit of the government’s judgment.
While fiscal measures were put in place, the major steel makers were asked to cut prices in specific amounts. The government perhaps tried everything out without being sure which one would actually work.
Then came another set of measures. Export duty on flat steel products, pipes, semi-finished products, pellets, sponge iron, etc were waived, while that on finished long products was raised. The government also at the same time raised the export duty on iron ore by bringing in an ad-valorem rate. While all these actions on steel were to curb inflation, the hike in export duty on iron ore was meant to conserve this mineral!
When an export duty is imposed, it is meant to make exports lose their attraction vis-?-vis domestic sales, which should ideally raise supplies to the domestic market and thereby help contain prices. In the context of the rising inflation and the nationwide panic that was set in motion, the government did not seem to have had any other major objective. From the revenue angle, it nevertheless made some sense for it to do something like this to offset the losses to the exchequer on account of the waiver of import duties. Whether waiver of import duty or imposition of export duty does really work in the expected line is a different issue.
But let me take the pricing scenario in which a steel maker will now take decisions with regards to exports at the ruling international prices. At $950 per tonne, the exporter gets an FOB value of Rs 40,375. By exporting a tonne of billets, one gets Rs 48,875 ($1,150), whereas net of export duty, one gets Rs 45,156 (at the base FOB price of $1,250) from a tonne of rebar. The current domestic prices have no relation with them. Ignoring the value addition costs to convert a tonne of billets into rebars, there is great incentive to export billets that has seen export duty gone down rather than rebars, which has seen an increase by 5%. If you consider the value addition costs, it will make all the more sense for the steel makers to export pig iron as much as possible instead of taking the trouble to make steel and then roll them into finished products! The market simply is not working here.
The government seems to be looking only at the prices of steel and not their demand for it in the country. Steel consumption growth rate has been moving downhill and the fact that the domestic prices, even for long products, are lower than the global or border prices, indicate that it is not so much the government measures but the recession in the market that has brought prices down. Export duties on steel or iron ore will not help growth and in a way slowdown potentially strong businesses further.
The author is an independent strategy consultant, Steel and Natural Resources