India's Steel Export Duty Likely To Put Expansion Plans At Risk

India's export duty on steel has likely put the mills' expansion plans in limbo.

The country has levied a 15% export duty on some steel products to boost domestic output and cool inflation. That, however, may be a disincentive for the manufacturers' proposed capital expenditure.

Indian steelmakers have lined up a capex of Rs 5 lakh crore for the next five years, said Dilip Oommen, president at Indian Steel Association and managing director of ArcelorMittal-Nippon Steel India. His company alone is looking to invest Rs 1 lakh crore, but this will be “under review” if the export duty isn't rolled back and domestic demand remains tepid, he told BQ Prime.

The duty amplifies margin risk for steel mills. Prices have fallen, raw material costs spiked, domestic demand failed to pick up, and seasonally weak monsoon period has kicked off. Analysts, including at JPMorgan and Jefferies, termed the export levy as “negative” for the sector.

In cases where investments have been rolled out, they may continue, but the ones that are in the “drawing stage may not go through as any investor would look for returns”, according to Alok Sahay, secretary general and executive head at Indian Steel Association.

“Any market with new product additions will take time to absorb the new products having new dimensions or a new quality parameter,” said Sahay. “During this gestation period, exports are the only outlet to keep economies of scale in production. If the new capacity additions are only dependent on domestic demand, then it will, in most cases, be unviable as during the gestation period of demand creation, exports are the only way to keep the production going.”

Tata Steel Ltd. in an interview to BQ Prime after fourth-quarter earnings, said though it may continue the ongoing expansion at its Kalinganagar, Odisha, plant, it may review its long-term capex plan depending upon domestic consumption and the imposition of export duty, since exports constitute 10-15% of its overall volumes.

Capex plan beyond FY25, Edelweiss Securities said, would likely be revisited in view of the tough regulatory framework that may lead to “sub-optimal returns”.

The deferment in expansion, if any, also poses a challenge for the government's target to export 5.5 million tonnes of specialty steel—high value-added steel used in defence, space, power, automobiles and capital goods—by 2026-27 against 1.7 million tonnes at present.

Jindal Steel & Power Ltd. had said the levy “would not be competitive” even as it sees the move as “temporary” and expects “things to be normalised” by July.

That probably prompted JSPL to remain committed to capacity expansion plan that's already in advanced stages. JSW Steel Ltd., too, expects to stick to its road map.

Five-Year Capex Plan

The steel ministry has set an industry capacity target of 300 million tonnes by 2030 from the current 143 million tonnes. The top five producers, however, have plans to add 20 million tonnes of capacity by 2025 and another 40 million tonnes between 2025 and 2030.

• ArcelorMittal Nippon Steel has executed a pact with the Odisha government for a greenfield integrated plant with 12-million-tonne-per-annum capacity in Kendrapara district.

• Tata Steel has an option to double the capacity at Kalinganagar to 16 million tonnes per annum, and expand Bhushan Steel's Angul plant to 8 mtpa. An expansion at newly-acquired Neelachal Ispat Nigam Ltd. plant to 10 mtpa is also on the cards.

• SAIL has a long-term plan to increase its capacity to 50 MTPA. But the management said much of the allocation would depend on domestic consumption.

• JSW Steel is considering a 16 mtpa greenfield plant in Odisha.

• JSPL has long-term plans of expanding the capacity of Angul plant to 24 mtpa.

In comparison, the top steelmakers had expanded their capacity by 20 MTPA in the last six years—the most by JSW Steel, followed by Tata Steel.