Contrarian voices are being heard from the domestic steel industry after the Central government recently imposed 20 per cent provisional safeguard duty on specific steel products following a recommendation by the Director- General of Safeguards. The steel imports attracting this duty are “hot rolled flat products of non-alloy and other alloy steel in coils of a width of 600 mm or more”. By law, provisional safeguards are valid for a period of 200 days.
Integrated Steel Producers (ISPs) are among the most vocal supporters of the move. Tata Steel (India & South East Asia) Managing Director TV Narendran told Deccan Herald, “The government has recognised the issues being faced by the domestic steel industry arising out of dumping of steel from countries having surplus steel capacities. The safeguard duty should help in curbing predatory pricing and surging imports which has seen an increase of about 60 per cent over the corresponding period last year.”
India is the ideal location for the steel Industry to grow as it has the required raw material and a consuming market, Narendran said, adding the Indian steel industry has been among the largest investors in manufacturing in the last ten years, spending money on expanding capacities and bringing state-of-the art technologies.
JSW Steel Director (Commercial and Marketing) Jayant Acharya said, “The 20 per cent safeguard duty is a welcome step against the dumping of cheaper imports into India, especially from China, Japan, Korea, and Russia. This will help in controlling the surplus capacity and stabilising the domestic demand-supply balance. It will also help the domestic players to boost our Prime Minister Narendra Modi’s ‘Make in India’ campaign.”
Indian Steel Association (ISA) Secretary-General Sanak Mishra also welcomed the move. “This move signifies that the Government of India appreciates the criticality of the situation faced by the steel industry on account of cheap imports. We would expect more such positive steps in the future as well, to put the industry on a more sustainable footing.”
In contrast, smaller players involved in cold rolling and annealing of hot rolled coils (HRC) are aghast at the move. The Federation of Associations of Maharashtra (FAM) President Mohan Gurnani said, “Imposition of safeguard duty of 20 per cent on hot rolled flat products is an extremely retrograde step by the government. Only recently India increased basic customs duty twice by 2.5 per cent each making the effective rate 12.5 per cent (from 7.5 per cent). And now this 20 per cent safeguard duty takes the total effective duty to 52 per cent, considering the 12.5 per cent countervailing duty (CVD), and the cascading effect of duty on duty.”
“It is preposterous that majors are spending time and energy to destroy the small and medium businesses by instigating such a move, instead of focusing on new areas of business or optimising their resources,” said Vinod Bane, spokesperson for the BIS action committee formed by FAM and BIMA (Bombay Iron Merchants’ Association) in a release.
Then there are other players for whom the move cuts both ways. Talking to Deccan Herald, Uttam Galva Steels Director Ankit Miglani said, “For us, it is a neutral. For Uttam Value Steels, it is a positive. On the other hand for Uttam Galva Steels, it is negative. For the latter, hot rolled coil is a raw material. For Uttam Value Steel, it is a finished product. The duty is only on hot rolled coil. So for Uttam Galva Steels, hot rolled coil is a raw material. So my raw material will become more expensive and there is no protection on the finished product.”
Import surge in numbers
Steel companies had told Director-General of Safeguards Vinay Chhabra that while steel imports made up five per cent of the country’s total production in FY2014, they have since then increased and are on course to hit 13 per cent this fiscal year (FY16). Steel imports jumped 72 per cent in the last fiscal year to 9.3 million tonnes. Last month, the government had hiked import duty on base metals, including iron and steel, by 2.5 per cent in a move aimed at helping domestic players battling cheap Chinese imports after the currency devaluation by China. Earlier in June, India imposed anti-dumping duty of up to $316 per tonne on imports of certain steel products from three countries, including China, to protect domestic producers from below-cost, inbound shipments.
It was in July that the Steel Authority of India (SAIl), JSW Steel, and Essar Steel filed an application before the Director-General of Safeguards seeking safeguard measures for a four-year period. Steel companies pushed for the safeguard duty because it would apply to all countries. Import duty, for instance, would not apply to countries like Japan and South Korea with which India has free trade agreements (FTAs). Steel imports last year from South Korea and Japan, which pay duties of less than 1 per cent due to the FTAs, were an estimated 3.5 million tonnes.
Will the duty push up prices?
Smaller players feel that the safeguard duty plays into the hands of integrated players since it would allow them to push up prices. FAM’s Gurnani said, “As a result of the safeguard duty, domestic prices will increase by minimum 15 per cent. Moreover, products made from hot rolled coils would start getting imported. This clearly shows government wants to bail out steel majors at any cost even at the expense of millions of small steel users.”
When asked about the impact of steel prices, Uttam Galva’s Miglani said, “An increase of Rs 2,000 is on cards over the next two months. The duty has been imposed only last Monday, it will take time to impact on sales. In domestic sales, the biggest challenge is liquidity. There is a shortage of working capital across the entire value chain which is putting a lot of pressure on demand.”
JSW’s Jayant Acharya added, “The move will bring about a balance in the demand-supply scenario but I don’t see it pushing prices higher in the near term. What can immediately happen is stability in the demand-supply situation. Prices will move up gradually, but it is difficult to give a timeline for it.” Asked about the possibility of a price rise, ISA’s Sanak Mishra said, “It is expected that the downward slide in domestic prices of hot rolled coils will be mitigated to some extent, and market may see more stable prices.”
Meanwhile, analysts said the hike in safeguard duty will benefit the steel sector. Bank of America- Merrill Lynch (BoFA-ML) said, “While safeguard duty should benefit the steel industry, the banking system will be a much bigger beneficiary.” India Ratings and Research (Ind-Ra) said the safeguard duty will be a welcome relief for the steel sector, which is struggling due to cheap imports from China and countries with which India has FTAs.
“That said, the higher safeguard duty would benefit the ISPs, but negatively impact the companies involved in cold rolling and annealing of HR coils. However, the players could circumvent this by importing HRC with some value addition,” it added.
What is safeguard duty?
Through an amendment to the Customs Tariff Act, 1975 (Section 8B), the Central Government is empowered to impose safeguard duty on goods which enter in increased quantities and cause or threaten to cause serious injury to domestic industry producing like or directly competitive goods.
Is the safeguard duty WTO-compatible?
In fact, the roots of this trade remedy lie in Article XIX of GATT, 1994 (and its pre-WTO version). This provision allows a WTO member to restrict temporarily imports of a product (known as ‘safeguards’ action) if its domestic industry is affected by a surge in imports.
Why are countries with FTAs not spared from safeguard duty?
Again, it is due to the WTO principle of non-discrimination embodied in the Agreement on Safeguards. It provides that, in most cases, safeguard measures must be applied on a non-selective (most favoured nation or ‘MFN’) basis.