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Export duty on steel far outweighs raw mat. duty benefits 

The Government of India on 21st May 2022, imposed hefty export duties on steel / raw materials to curb higher exports / inflation. The Government has imposed export duty of 50% on iron ore of all grades, 45% on pellets and 15% duty on a host of steel products (refer exhi. 1). This move clearly hints at Government’s intention to control exports / inflation and ensure higher domestic supplies. GOI has also cut the import duty on coking coal, metallurgical coke as well as PCI / anthracite coal to offer marginal relief to producers grappling with higher inflation (refer exhi. 2). The imposition of export duty is likely to lead to a) lower export volumes as India is rendered uncompetitive globally (refer exhi. 4 for company wise exports) b) availability of more material domestically is likely to lead to a correction in prices - (refer exhi. 7 for sensitivity) c) export duty imposition on iron ore is likely to lead to a correction in prices - likely to cushion the fall in spreads d) removal of import duty on coal will have a marginal positive impact on spreads. We also await Industry response / representations if any to GOI’s move. The export duty imposition comes at a time when steel prices / spreads are already set in correction mode, given weak demand outlook. As per our analysis, imposition of export duty on iron ore and flat steel products as well as removal of import duty on coking coal could likely lead to a 15 / 20% fall in EBITDA / TP. JSW / SAIL / NMDC are expected to be impacted the worst while Tata / JSP are likely to be relatively better off. We continue to re-iterate our negative stance on the ferrous space (see, Double whammy of margin squeeze, demand destruction likely).

Imposition of export duties by the Government:

The Government of India on 21st May 2022, imposed hefty export duties on steel / raw materials to curb higher exports / inflation. The Government has imposed export duty of 50% on iron ore of all grades from 30% previously only on ore of grade above Fe58%. Pellets have also attracted a high duty structure of 45% (previously duty free). While a 15% duty is imposed on a host of steel products (refer Exhi.1). This move clearly hints at Government’s intention to control exports / inflation and ensure higher supplies for the domestic industry. GOI has also cut the import duty on coking coal, metallurgical coke as well as PCI / anthracite coal to offer marginal relief to producers grappling with higher inflation (refer exhi.2).

Export duties to impact steel majors negatively

The imposition of export duty is likely to lead to a) lower export volumes as India is rendered uncompetitive globally (refer exhi. 4 for company wise exports) b) availability of more material domestically is likely to lead to a correction in prices - (refer exhi. 7 for sensitivity) c) export duty imposition on iron ore is likely to lead to a correction in prices - likely to cushion the fall in spreads d) removal of import duty on coal will have a marginal positive impact on spreads. We believe the spreads will trend downwards till the time coking coal prices hold in the range of $450-500 per ton, especially in a backdrop of falling steel prices. Spot spreads already reflect considerable drop in profitability (refer exhi 5). We also await Industry response / representations if any to GOI’s move. As per our analysis, imposition of export duty on iron ore and flat steel products as well as removal of import duty on coking coal could likely lead to a 15 / 20% fall in EBITDA / TP. JSW / SAIL / NMDC are expected to be impacted the worst while Tata / JSP are likely to be relatively better off.

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