Steel stocks plunged on Monday, with the BSE Metal Index falling 8.3%, its biggest one-day fall since March 2020, as companies said new export taxes on key primary steel products would reduce their output and push back investment. With Monday’s fall, the index fell 25.2% from its April high, erasing investors’ wealth of 2. 2.6 trillion.
On Saturday, the government announced that from Sunday, effective 15% export tax would be levied on selected flat-rolled products of selected pig iron, iron or non-alloy steel, bars and rods, and various flat-rolled products of stainless steel. .
Although the new impost aims to curb rising mining prices and increase its availability and use in the local market, all primary steel makers consider the government’s decision “untimely” because “steel prices have already been revised”.
Dilip Omen, CEO of ArcelorMittal Nippon Steel India Limited, said the export tax would hit the firm’s exports of 90,000 tonnes of steel per month.
Omen added that it would reduce new investment. Separately, the Indian Steel Alliance said the main primary steel product steel export tariff would “send a negative signal only to investors in the steel sector and adversely affect the sector’s capacity utilization”.
Jindal Steel & Power led the fall in metal stocks on Monday as its shares fell 17.4%, its biggest fall since January 2008. Tata Steel has lost the most since August 2015 at Rs 1,023.60 to end the session on the BSE. Shares of JSW Steel fell 13.2% to close at 547.60 on the BSE, the highest fall since March 2020.
As of Monday’s close, the combined market capitalization of metal stocks stood at Rs 8.34 trillion.
The government has also removed import duties on coking coal and coke to reduce the cost of steel production, but JSW Steel Group CFO Sheshagiri Rao said tax relief for these inputs would have “only a minimal impact” on the steel industry – their prices have risen in recent months.
The government has also increased export duty on new iron ore and concentrated it from 30% to 50% and increased the duty on gram from zero to 45%. Influenced by New Delhi’s decision, benchmark iron ore futures in China – the world’s top consumer of ore – rose nearly 7% in early trade on Monday, tracking their biggest daily jump in two and a half months, Reuters reported. Rao, however, said that the export duty on ore would be “of no use” to Indian steel makers as it would not reduce the price of iron ore in the domestic market in line with international prices.
Rising steel prices, along with a strong balance sheet, have attracted investors late. The BSE Metal Index, which has been an under-performer for three years since 2020, has since bounced smartly with a 52.2% gain. In contrast, the Sensex added 13.7% over the same period. The four largest steel producers simultaneously reduced their debt by 40% and net debt / EBITDA FY2020-22 from 6.2X to 1.1X.
Analysts see the recent tariffs as a very negative development for the sector and expect broad-based, multiple de-ratings. According to them, the tariff will not only depend on the earnings of mills from abroad, but will also reduce domestic prices as a result of excess supply in the market.
According to ICICI Securities, most steel / stainless steel exports will now attract 15% export duty, as opposed to the previous tariff. “We see this as a very negative development for the steel sector and expect broad-based multiple de-ratings,” ICICI Securities wrote in a note.
Domestic flat steel (HRC) prices have risen 88% since January 2020 and have had a negative impact on the consumer sector, such as infrastructure and automobiles. The rise in metal prices has benefited Indian steel players immensely in the last two years due to rising demand and supply constraints due to geopolitical tensions following the Covid-19 disruption.
Analysts at Kotak Institutional Equities expect that the imposition of 15% export duty will lead to an 8-10% correction in domestic steel prices. “Increase in export duty on iron ore and gram will further add to the domestic surplus and reduce the price of iron ore by Rs. 1,250-1,500 / ton. In the end, a 2.5% reduction in import duty on coking coal would reduce the cost for steel producers by Rs 600-800 / ton, “KIE observed in an investor note.
India exported 13.5 million tonnes (mt) of finished steel worth Rs 1 trillion in 2021-22 and the industry expects exports to reach at least 18 million tonnes in the current financial year.