Export duty on steel puts pressure on capex returns; Tata Steel, SAIL may see lower realizations

The decision is aimed at bringing down domestic steel prices and shielding the downstream industry after a surge in global commodity prices following Russia’s invasion of Ukraine.

The move to impose a 15 per cent export duty on steel products, the first ever such step, will exert a major impact on the sector’s exports, said Axis Securities in a note.

“The 15% export tax will reduce the margins on steel exports, which were attractive for the last year due to lower exports from China (due to its de-carbonisation drive) and higher energy prices in Europe,” the brokerage said.

In the two years starting FY20, India’s total steel exports rose 74 per cent to 20.5 million tonnes, leading to a rise in capacity utilization of the industry to 83 per cent in the previous financial year from 79 per cent in FY20.

The share of exports in total sales was the highest for JSPL Steel- 35 per cent in FY21 followed by JSW, which had a share of 31 per cent in the first nine months of FY22, Tata Steel at 14 per cent, and

at 9 per cent, Axis Securities said.

THE KEY STEPS

The government’s moves included imposition of 15 per cent export duty on long and flat steel – non-alloy, alloyed and stainless as well as a sharp increase in exports duty on iron ore exports and concentrate from 30 per cent to 50 per cent.

Additionally, the government announced duties on iron ore of all grades as against duty of 30 per cent imposed only on iron content of 58 per cent and above grade before the decision, Axis Securities wrote.

Export duty on iron ore pellets also saw a massive rise from zero to 45 per cent, while that for pig iron was hiked from nil to 15 per cent.

A step that, according to Axis Securities ,would provide relief to stainless steel producers was the cut on ferronickel duty to zero from 2.5 per cent.

HOW WILL INDUSTRY FARE?

While the government’s desire to rein in soaring consumer prices is understandable, the introduction of the steel export duty stands to significantly affect the sector’s export goals at a time when then the domestic industry was planning to use capital expenditure to enhance production capacity amid China’s moves to dissuade steel exports.

With domestic steel prices seen facing downward pressure if major steel companies were to divert their export volumes to the local market, incumbent companies would see a significant hit on profit margins, Axis Securities said.

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“We believe the steel companies will protect their domestic sales margins by reducing their capacity utilization, rather than diverting sales volume in the domestic market. We will be watchful on the commentary from steel companies on their strategy to counter the negative impact of this announcement.”

FALLING PRICES, STOCK VIEWS

According to Axis Securities, the government’s move could lead to a 7 per cent decline in domestic steel prices, with a 15 per cent fall in export realization from the new duty.

At present, the domestic prices of hot-rolled oil are above those of China-landed prices, the brokerage said, adding that it expects local prices to correct in line with import parity.

As domestic availability of iron ore improves, local iron ore prices are expected to fall, Axis Securities said.

“However, for

and SAIL, we don’t factor in any major benefit from the iron ore price decline as both the companies have 100% captive iron ore.”

JSW and JSPL, however, would stand to benefit from iron ore as they are not fully integrated on the iron ore front, the brokerage said.

After factoring in an 8 per cent fall in blended realization and savings from coking coal prices, Axis Securities has cut its EBITDA estimate for SAIL by 30-36 per cent and for Tata Steel by 14 per cent over the current financial year and the end of the next.

Accordingly, the target price for SAIL has been reduced from Rs 125 to Rs 75 and that for Tata Steel from Rs 1,700 to Rs 1,390, Axis Securities said.

“We downgrade SAIL to HOLD from BUY and maintain BUY on Tata Steel.”

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)