Efficiencies RCEP inclusion can bring for the steel sector
The implications of joining the RCEP need to be looked at from a slightly different light. There are three issues that industry (namely steel) needs to consider:
i) FTA with ASEAN may actually help in pushing steel exports in a period where domestic demand is slowing down considerably
ii) The current anti-dumping duty (ADD) needs to be introspected. No serious country can restrict HRC imports below US$484/te through ADD and at the same time export HRC at US$450-455/te, a price where recent deals are happening. Maybe inclusion in RCEP can lead to the right introspection,
iii) while in 2015, author was rooting for protection given the sharp increase in exports witnessed, protection cannot be the bedrock for capacity expansion without gaining any meaningful global competitive advantage. We would continue to highlight that given the stage of the cycle, stick to BUY strategy below 0.5x P/B (1-year forward).
* What is RCEP? The FTA, which is envisaged to link 10 ASEAN nations with China, South Korea, Japan, Australia, New Zealand as well as India, is due to conclud by November, 19. India, understandably, worries about entering into an FTA with China. Other members of the RCEP seem to have taken it for granted that almost all tradable goods — ~90% — should see the elimination of tariffs in short order. India, if it intends to remain a part of the RCEP process, will clearly have to make some compromises, as has been underlined at the recently concluded ministerial-level RCEP meeting in Bangkok. Some members of the RCEP have reportedly asked India to make up its mind if it wants to stay in the group.
* To restrict imports or help push exports – what should steelmakers vie for? India has turned into a net exporter of HRC and CRC for the first time in 14 years. There are ample signs visible that steel demand (longer term) will perhaps be capped at ~150mtpa. Under such a scenario, inclusion into RCEP can help create stable flows of Indian steel into regional peers. Steel players and government should also explore RCEP from a demand-creation standpoint. Also, the fear of imports from China is relatively unfounded and, if witnessed, can be better addressed by staying within the RCEP framework vis-a-vis staying out.
* Induction to RCEP can help avoid some of the trade irregularities visible now. India continues to impose ADD, thereby, eliminating HRC imports below US$484/te while currently exporting HRC to the region at US$450-455/te. Induction into RCEP will regularise current duty structure. Separate duty action may not be required.
* Protecting the industry through duties has limited economic rationale now. While the author has been rooting for industry protection in 2015 (High time to thwart the contagion), the industry is a lot more consolidated now and in stronger hands. Duty protection from hereon may lead to excessive capacity creation, especially, when domestic demand has started to falter, perhaps structurally. Protection cannot be the bedrock for capacity expansion without gaining any meaningful global competitive advantage. The incentives as well as the inflationary impact need to be well thought out.
* Stick to buy strategy below 0.5x P/B. We have been highlighting the framework which has worked for the last 23 years of available trading history for some of the Indian metal names - refer to our reports (The cycle is testing 0.5x P/B across the sector). The simple, heuristic retain, is the strength to predict value at the bottom of the cycle as earnings analysis falters.
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