Doemstic steel production spurt unlikely to continue beyond August: Ind-Ra

20 July 2016

The spurt in doemstic steel production is supported by the Minimum Import Price (MIP) policy and is unlikely to continue beyond August 2016 after it ends, ratings agency India Rating & Research (Ind-Ra) has said. While production grew by 3.8% year on year (y-o-y) in Q1FY17, compared to a decline in FY16, the agency said protection measures beyond August 2016 will be required to safeguard the interest of the domestic steel industry. MIP was imposed in February 2016 on 173 steel products for a period of six months which will end on August 5, 2016.

In this scenario, replacement of MIP with anti-dumping duties may not have the desired impact, since anti-dumping may not be as widely encompassing as the MIP, it noted. While the steel industry is arguing for an extension of MIP, the rollover would remain a formidable decision for the government.

Post MIP, there was minimal growth in domestic steel production during February and March 2016, with total steel production growing by a meagre 0.3% y-o-y. Exemptions available for letters of credit for imports opened prior to the imposition of MIP resulted in imports growing by 4.4% y-o-y during the said period. In Q1FY17, overall steel production grew by 3.8% y-o-y but consumption grew by only 0.3% and imports fell by 30.7% y-o-y. Thus domestic production growth has been a result of import substitution and not steel consumption growth, Ind-Ra said.

In June 2016, there was a sharp decline of 4.3% y-o-y in steel consumption in stark contrast to the positive y-o-y growth in steel consumption seen since April 2015 till May 2016. One reason for the fall in consumption levels in June 2016 could be delay in purchases by users, based on the expectation that prices will moderate post expiry of MIP.

The ratings agency also felt profitability of most steel producers is likely to remain under pressure, due to the newly added capacity. The interest cost and depreciation from these new capacities have now started to impact income, leading to higher operating and financial leverage. For these companies to see a healthy profit generation, capacity utilisations levels will need to increase significantly.


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