Steel exports, which reached a record 18.3 million tonnes last year, continue to grow due to disruptions caused by the ongoing conflict between Russia and Ukraine. Russia is a major exporter of steel, coking coal and pig iron.

In addition, the European Union (EU) decision to increase India’s export quota – amid a widening gap between steel prices in the two geographies – has benefited steelmakers. and limited the impact of a 25% customs duty on steel imports imposed by the EU.

As steel companies benefited from big overseas achievements, domestic demand rose 11% year-on-year, pushing domestic prices to all-time highs. That led to soaring construction costs and multiple price hikes by makers of automobiles, consumer appliances and durable goods to pass on the increase, which weighed on domestic demand, Crisil said.

The increase in export duties was intended to curb this inflation.

“The tariff-induced price correction will improve the availability of steel in the domestic market as finished steel exports decline. This will have a direct impact on India’s export volume over the next steelmakers will attempt to circumvent duties by increasing exports of alloy steel and billets, but this is unlikely to compensate for the loss of finished steel exports,” said Hetal Gandhi, director of Crisil Research.

For the record, the government has also increased the export duty on iron ore to 50% and that on pellets to 45%, alongside the reduction of the import duty on coking coal, injection coal pulverized coal (PCI) and 0% coke 2.5%.

The duty revisions will have a significant impact on export volumes of iron ore and pellets. Unlike steel, where specific grades have been targeted, iron ore and pellets are effectively subject to a general export duty. The combined export volume of iron ore and pellets is expected to experience a massive drop from 26 MT in the last fiscal year to 8-10 MT in the current, and lead to a sharp correction in domestic prices. True, merchant miners have already reduced iron ore prices by 25-35% since the announcement.

The removal of import duties on coking coal and PCI coal has, in turn, lowered costs for integrated steel producers, who are largely dependent on the import market.

The imposition of export duties on steel and iron ore by the government has helped stem the uncapped rise in domestic steel prices. Steel prices (ex works) which averaged ~ ₹77,000 per tonne in April, had already cooled by ₹4,000-5,000 per tonne in early May in line with world prices. The imposition of duties has further depressed prices, with current prices close to ₹14,000-15,000 per ton less than the April peak. In addition, world prices (FOB China) also corrected as landed prices of hot rolled coils (HRC) fell below domestic prices.

The fall in steel prices has, in turn, contributed to the recovery of domestic demand in the flats segment. Automotive production and construction activity picked up in June. With the onset of the monsoon, a seasonal moderation in demand is expected, which will put further downward pressure on steel prices.

“The steel price correction was already on the cards when global prices began to correct. The duty revisions eased uncertainty in global markets and set the tone for a faster near-term correction. mid-June the prices are already at ₹62,000-64,000 per ton and a lower trend can be expected ₹60,000 per tonne by the end of the fiscal year,” said Koustav Mazumdar, Associate Director, CRISIL Research.

An interesting trend to watch for this fiscal year, according to the rating agency, is the difference in margin contraction for large players and small and medium-sized companies. Large integrated players with capacities based on flat steel export 20% of their production, while small and medium-sized companies operate mainly in the long steel segment, where exports are negligible. Therefore, we could see a relatively higher contraction in operating margins for large players as export opportunities diminish, while it would be less pronounced for small and medium-sized players, especially with the pressures on raw material costs to some extent.

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