Govt’s steel dilemma: Restrict imports and risk inflation or hurt capex?

If it does impose a levy, steel prices are likely to go up from the current multi-year lows, with a potential knock-on effect on inflation. If the government doesn’t intervene, steel companies have threatened to pull out of capital expenditure (capex) plans in capacity expansion, risking India’s self-reliance for steel.

What is happening in the steel industry?

India remains the only major economy with a rapidly growing demand for steel while demand falls squarely across other major markets. This has pushed many countries, especially China, to ship their excess production to Indian shores at cutthroat prices. The competition from cheap imports is making Indian mills drop their prices too, shrinking their margins.

Also read | Steelmakers warn of Q3 revenue drop, pin hopes on Q4 rebound

India’s steel imports have gone up by 52% between April and October this year to 5.38 million tonnes, as per BigMint, a market intelligence firm. Chinese steel shipments to India more than doubled year-on-year to 1.61 million tonnes during this period.

This has caused domestic steel prices to drop to a four-year low with benchmark hot-rolled coil (HRC) prices averaging ₹48,160 per tonne in November, 12% lower year-on-year.

What do Indian steelmakers want?

Indian steel mills are seeking a safeguard duty on the imports of steel to level the playing field. They allege that the Chinese government support available to steel mills in China is allowing them to sell steel to India at prices that are often below production costs (a practice known as dumping), upending the competitive landscape. Similarly, they allege that countries with which India has free trade agreements, like South Korea, Vietnam and Japan, are also selling steel in India at predatory prices.

The Indian Steel Association, a lobby group for major steel companies, lodged a formal complaint against steel imports from Vietnam, prompting the Union government to launch an anti-dumping probe in August.

Also read | India defines green steel; will rate companies on basis of emission intensity for steel production

Steelmakers have hinted at delaying investments into domestic capacity expansion if the status quo remains.

“We are now cutting capex, because margins are not enough to do capex anymore,” said Jayant Acharya, the joint managing director of JSW Steel, which has the largest domestic steel manufacturing capacity in India.

“So, is India as a country okay to become reliant on imports of steel? What happened to penicillin, what happened to toys, what happened to containers, tomorrow will happen to steel,” he told Mint.

Would a safeguard duty on imports have any undesirable effects?

Any safeguard duty levied in steel imports will result in an increase in the domestic prices of the alloy. This could have a knock-on effect on various steel consuming sectors like infrastructure, housing, automobiles and consumer durables, as their input costs go up.

An increase in steel prices could trickle down to the inflation numbers too, making the decision to levy any duties on steel import a delicate act of balance for the government.

Union minister of commerce and industry Piyush Goyal, steel minister H.D. Kumaraswamy and executives of leading steel mills met earlier this month in New Delhi to discuss these issues. At the meeting, the steel ministry proposed a 25% safeguard duty on steel imports, PTI reported citing unnamed sources.

Has New Delhi faced a similar dilemma in the past?

This is not the first time that the government will be doing a balancing act with the steel industry and inflationary concerns in the wider economy. After steel prices reached an all-time high of ₹78,000 per tonne of HRC in April 2022, the government intervened to levy a 15% duty on the exports of steel in May to increase availability in the local market and arrest runaway prices.

Also read | India to come up with mitigation action for high carbon-emitting sectors like steel, cement, refineries, fertilizers

The government also removed import duties on key inputs like coking coal to further help reduce the cost of steel in the domestic market. The status quo was later restored in November that year, but by then steel prices had cooled off to an average of ₹56,000 per tonne of HRC.

Markets face the opposite problem, with steel prices falling to multi-year lows. Whether the government intervenes to restrict imports and cushion the falling steel prices remains to be seen.