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Safeguard duty might help steel firms lift volumes not prices

With the safeguard duty in place, the focus for steel companies will be to improve capacity utilisation rather than raising prices. At best, the prices could increase by Rs.1,000 a tonne over the next 200 days, that is, till the time the duty is applicable. There has been no price increase ever since the safeguard duty was imposed and very little price increase will happen. In absolute terms, it can go up to a maximum of Rs.1,000 a tonne over the next 200 days. There is already too much capacity and demand is not that strong; JSW Steel group chairman and managing director Sajjan Jindal said. JSW Steel happens to be the largest steel maker in the private sector in India.

The industry, however, is treading cautiously on price, for more reasons than one. First, China has already dropped prices by 10 per cent. Landed imports of hot rolled coils are now at $ 297 a tonne compared to an ex- plant price of $ 400 a tonne for the home steel. They are now threatening to reduce prices by another 10 per cent; Jindal said.

China was anyway selling $ 80 below its marginal cost ( the cost added by producing one extra item of a product).

That apart, the user industry, which is anyway upset about the safeguard duty, would not accept any significant price increase. The safeguard duty is for six months, after which the government would take a view on whether there is injury to the industry. If there is, then the duty could be reviewed upwards also up to a period of four years." There is resistance from the user industry. If cheap imports continue to flood the market, then the steel industry will die and the user industries will also not benefit," Jindal said.

The steel industry has already made representations to the government to extend the safeguard duty on the entire value chain of steel products, cold rolled, galvanised, wire rods, TOR steel. The safeguard duty is applicable on import of hot rolled flat products of non- alloy and other alloy steels with a width of 600mm or above.

Cheap imports from China and countries with free trade agreements like Japan and Korea, have been hurting the sector for a while. According to India Ratings and Research, Indias import of iron and steel rose 58 per cent during AprilJune 2015 period, making it the countrys sixth largest import. The sectors contribution to stressed advances stood at 10.2 per cent of the total advances as of December- end 2014 and is among the top five sectors with stressed loans in the system.

Of the four companies where lenders have invoked the strategic debt restructuring, two; Electrosteel Steels and more recently Visa Steel -belong to the steel sector. Right now, the focus for the sector is to improve capacity utilisation, which has been hovering at the 75- 80 per cent levels for the last five years, for better fixed cost absorption leading to an increase in Ebitda ( earnings before interest, taxes, depreciation and amortisation) per tonne. Jindal says it could increase to 86 per cent.

Business Standard, New Delhi, 26th Sept. 2015