Steel stocks bleed heavily after government hike in export duty | Tata Steel down 12%, JSPL down 17%, JSW Steel down 12%

As India grapples with unrelenting inflation in crude and other metals and minerals, the government is clearly moving on a war footing. The cut in excise duties on petrol and diesel was not an isolated event.

It was combined with export duties imposed on iron and steel and duty cuts on specific steel inputs. The idea is to make domestic steel production cheaper and to also ensure that more steel is available for domestic use than for exports.

The reasons are not far to seek. If you look at the Q4 results for the March 2022 quarter, the story of companies facing margin pressure continues. That is largely because most companies have not been able to pass on the entire input cost hike.

Also, the quarter has seen a new kind of pressure of inventory stocking, which impacted net cash from operations. These can be resolved by a series of government sponsored initiatives.

So here is what the government has decided to do. The Ministry of Finance has notified export duties on 11 iron and steel intermediates. The idea is to curb exports of these products. Many of the steel companies made hay while the sun was shining.

In the sense that exports were suddenly looking too lucrative and that was impacting the availability of steel for India’s own domestic industries. The export duties will partially solve that issue.

The second issue is about a spike in the price of key raw materials that go into the manufacture of steel. Some of the duty cuts on imported inputs will directly reduce input costs.

Government reduced the import duty on coal and anthracite from 2.5% to 0%; import duties on coke and semi-coke from 5% to 0% and the import duties on ferronickel from 2.5% to 0%. Incidentally, Ferronickel is an alloy containing iron and nickel.
 

Export duties have hit steel companies hard

Out of 11 items, export duties were enhanced on one item while export levies were imposed on 10 other items. This includes export of iron ore and few steel intermediates where the higher export duty will increase domestic availability. Export duty on iron ore and concentrates has been raised from 30% to 50%. At the same time, export duties has been imposed at 45% on lumps and pellets. For the rest, the export duty is 15%.

But why is this such an issue? Steel manufacturers have expressed concerns that these export duties may lead to cancellation of orders from the EU region since that was not factored in the price. Alternatively, the steel companies have to bear huge and unviable losses if they have to honour export obligations at contracted prices. Either ways, most steel companies are expecting a huge impact on their bottom lines due to this decision.

The impact was visible in the prices. As of 01:00pm on 23rd May, Nifty Metal index is down 7.2%. Among stocks, Tata Steel has lost 12%, JSW Steel is down 12.2%, Jindal Steel & Power is down 16.7%, SAIL is down 10% and NMDC was down 10.6%. Investors are clearly worried about the likely impact of the export duties on profitability of steel companies. That is evident from the prices.