Zodiac Clothing : Extract of Financial Results - Newspaper Publication 31.03.2022

MUMBAI

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WEDNESDAY, 1 JUNE 2022

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TAKE TWO 7<

Steel industry: From sprint to jog

Export duty hikes will slow the unprecedented growth of last two years and domestic demand may not pick up the slack

fell ~3,000-4,000 a tonne after the exportlevy;inthesecondarymar- ket, long steel has dropped about ~6,000 a tonne. Even before that, flat steel prices corrected about 10 per cent from April peaks in line with global prices.

Now, beginning June, steel mills are expected to announce a cut for monthly contracts. If demand doesn't pick up - without the cushion of exports - capacity utilisation may be impacted.

come as a huge relief, though currently steel prices have dropped more than raw material prices.

Export duty is not new to the industry. In May 2008, when steel prices were scaling record levels

-globallyandinIndia-thegov-

ernment imposed 5-15 per cent

duty across flat and long steel. In

flat steel, it was withdrawn in a

month and on long steel in five

months. Of course, the global

financialcrisisalsoplayedoutand

commodities collapsed.

Windfall tax on oil
companies: Where
does India stand?
ARUP ROYCHOUDHURY	while theoretically a windfall tax on oil com-
New Delhi, 31 May	panies can be imposed in India, there had

ISHITA AYAN DUTT

Kolkata, 31 May

Major economies pledged money in under-invested infrastructure in the

last two years to beat the Covid- 19 pandemic-induced slowdown, fuelling a rally in steel prices not seen since the Beijing Olympics- led boom in 2008.

Steel firms across the world rode the tailwind and posted unprecedented profits. In India, a two-year sprint was tripped in its tracks on May 21 when the government announced a 15 per cent export levy on steel.

The announcement was among a slew of measures taken to tame steel and its raw material prices as part of a larger move to combat soaring inflation.

On the raw material front, the 5 per cent and 2.5 per cent import duties on coke and coking coal, respectively, have been withdrawn to lower the cost of steel production.

Export duty on iron ore fines and lumps with iron content of 58 per cent and above has been raised from 30 to 50 per cent to improve domestic availability - measures aimed at easing raw material prices and softening the export duty blow.

Coking coal and iron ore are two key ingredients for steelmak- ing. At current prices, they account for about 90 per cent of the raw material cost, and about

METAL METTLE			(FIGURES IN ~ CRORE)
YEAR END	NET SALES	PBIDT	PAT	TOTAL DEBT
Tata Steel
FY19	154,692	30,819	10,218	100,803
FY20	146,106	14,908	1,557	116,328
FY21	154,719	30,684	7,490	88,501
FY22	242,327	64,790	40,154	75,561
SAIL
FY19	66,974	10,090	2,349	45,170
FY20	61,664	10,544	2,121	54,127
FY21	69,114	14,126	4,148	37,677
FY22	103,477	22,265	12,243	13,678
JSW Steel
FY19	82,499	19,126	7,639	47,376
FY20	71,116	11,524	4,030	61,399
FY21	78,059	20,651	7,911	62,366
FY22	143,829	40,714	21,187	72,237
Jindal Steel
FY19	39,372	6,943	-1,645	39,559
FY20	30,560	6,906	-109	36,824
FY21	34,579	11,245	3,634	29,310
FY22	51,166	13,675	5,753	13,502
Source: Capitaline			Compiled by BS Research Bureau

"Leading steel makers in India have been enjoying strong capacity utilisation levels on the back of exports. Therefore, any slowdown in exports can lead to lower capacity utilisation for them," explained Jayanta Roy, senior vice-president, ICRA.

Domestic capacity utilisation crossed the 80 per cent mark in FY2022 after seven years, according to ICRA. Lower capacity utilisation may also cast a shadow on the massive expansion plans chalked out by major players.

Large-scale expansion plans tobeimplementedinthenextone decade add up to around 130 mt, according to ICRA estimates. More than 90 per cent of that is accounted for by the big players who control about two-thirds of the production. But exports were built in the expansion plans and the levy has sent those assumptions into a tailspin.

Tata Steel - which is looking to double capacity by 2030 from around 20 mt - was planning to advanceitsgrowthoptions.Asked about it, T V Narendran, managing director and chief executive officer, Tata Steel, said, "We will wait and see what the govern- ment's medium-andlong-term view on export taxes is."

Dilip Oommen, president, Indian Steel Association, has said that the immediate impact of the decision is that the industry will review its massive expansion plans, as India is a net exporter. Oommen is also CEO of

But in 2008, Rao pointed out,

theimpactofexportdutywaslim-

ited as India was a net importer of

steel. Steel capacity has since

increased 152 per cent and con-

sumption92percent;importshave

declined32percent,whileexports

have increased 237 per cent.

Yet, it may not be the end of

thesteelstory."Sectorprofitability

will be more than what we have

seen in most of the last 10 years

as India's demand growth will be

strong, and Chinese exports are

not such a big issue now. Also,

cheap imports into India are no

longer the threat they were in the

past," Narendran said.

In the near term, domestic pri-

marysteelproducersmaywitness

fall in spreads by $80-100/tonne,

despite partial offsets from lower

production costs, said Manish

Gupta, senior director, CRISIL

Ratings. But overall spreads may

stillremainhealthyat$150/tonne.

The policy shock may be

absorbed to an extent by export-

ing more semi-finished steel,

which is out of the export duty

ambit even though margins will

be lower. But then there are long-

term customers who would need

to be serviced even with export

duties, and a complete change in

sales mix may not be possible.

Raw material prices fuelled by

the Russia-Ukraine war - both

major steel and raw material sup-

pliers to the world - may also

cool down (coking coal is signifi-

cantly down from peak levels).

Given that the previous inci-

										been no discussions on it within the
Against the backdrop of crude oil prices	Narendra Modi administration.
touching new highs due to Russia's invasion	On Monday, responding to speculations
of Ukraine, there has been a buzz in markets	of windfall tax, state-owned companies
about a one-time "windfall tax" on oil and	Oil India and Oil and Natural Gas
gas companies. The argument is that since	Corporation (ONGC) said they had not heard
energy companies have profited from high	anything from the government. "We have
oil prices, a temporary tax can be levied	not received any communication on this,"
upon them to shore up the government's	ONGC Chairman and Managing Director
finances. Many European nations have	Alka Mittal said at a media briefing.
already imposed a windfall tax or are con-	Indeed, if a windfall tax is imposed in
sidering doing so.								India, it will not only be aimed at private
										companies like Reliance, but also at state-
What is windfall tax?								owned behemoths. This means the latter
It is essentially a one-time tax imposed on	may have to compromise on dividends and
companies or sectors that have										share buybacks, both of which the
seen a jump in their profitabil-										Centre is a beneficiary of.
ity for any number of reasons.										On paper, the Centre could
The war in Europe has led to a										do with additional resource mobil-
spike in crude and commodity										isation as it faces a growing expen-
prices. Oil and gas companies										diture burden and a hit on revenue
around the world are making										in FY23.
money,	whether upstream,										India's fertiliser subsidy bill for
midstream or downstream.										FY23 could rise even further to
	DECODED
And these gains are not		around ~2.5 trillion as prices of
because of any improvement										chemical nutrients and natural
in their processes but because	If a windfall tax is	gas are expected to remain ele-
of the geopolitical situation.	vated. The FY23 fertiliser subsidy
imposed, it will not
Crude prices extended their	budget estimate is ~1.05 trillion.
gains on Tuesday after the	only be aimed at	Finance Minister Nirmala
European Union agreed to a	private companies,	Sitharaman had said on May 21
partialbanonRussianoil.Brent	but also at state-	that fertiliser subsidy would
crude rose 2 per cent to $124 a	owned behemoths.	require an additional outlay of
barrel,	while West Texas	This means the	~1.10 trillion over and above the
Intermediatecrudewastrading	latter may have to	budgetedamount,takingtheout-
at $119.34 a barrel, up 3.7 per	compromise on	lay to ~2.15 trillion. If the burden
cent from Friday's close.	dividends and	does hit ~2.5 trillion, that would
share buybacks
With governments taking	mean extra spending of around
fiscal measures to battle infla-										~35,000 crore.
tion, the talk of taxing companies benefiting	The impact of the latest round of excise
from the crude price rise has gained steam.	duty cuts on petrol and diesel will be around
While such proposals have been discussed	~85,000 crore for the year, which the Centre
and imposed earlier in many countries, last	will bear as the cut is on Road and

90 per cent of the coking coal requirements are imported.

The shocker for the industry, however, was the 15 per cent export duty, hitting 95 per cent of India's finished steel export bas- ket. Several brokerages immediately downgraded the sector or put it under review, and frontline steel stocks crashed, begging the question: Is the steel story over?

The unabated rally that saw domestic flat steel hot rolled coil (HRC) prices increase 88 per cent

- on the back of an increase in

raw material prices and global demand for the alloy - since January 2020 is now headed for a major price correction.

Thereasonissimple:the15per cent export duty makes Indian steel uncompetitive and demand in the domestic market is soft (steel demand declined 7.2 per cent month-on-month in April 2022). A supply overhang will naturally put pressure on prices.

India's finished steel exports in FY22 stood at 13.49 million tonne (mt) and total exports

(including semi-finished steel) wereat18.4mt-anall-timehigh. Sansadramaticshiftininfrastructure spend, domestic demand is unlikely to be able to absorb the additional volumes.

Finished steel consumption in FY22 stood at 105.8 mt and is expected to grow 7-8 per cent in FY23 (according to ICRA esti- mates), translating into incremental volumes of roughly 8 mt. That means supply will outstrip demand.

In the trade segment, prices

ArcelorMittal Nippon Steel India. Capacities created so far have factored in exports. "We created capacities not only to meet domestic demand but global demandaswell.Theobjectivewas toreduceimportdependencyand find new markets for exports," saidSeshagiriRao,jointmanaging director and group chief financial

officer, JSW Steel.

For the secondary producers

• with little exposure in export markets-greateravailabilityand cheaper iron ore and pellets have

dence of export duty was short-

lived,theindustryishopingforan

encore.Also,companiesarebetter

placed to combat adversities.

Players such as Tata Steel, Steel

Authority of India Ltd and Jindal

Steel & Power Ltd took advantage

of the upcycle to bulletproof their

balance sheets. On balance, a

stronger steel sector, which will

inherently feed on India's growth

momentum,maystillhaveaclear

track ahead of it. The signal has

turned from green to amber, but

it's not flashing red yet.

week the United Kingdom announced a 25	Infrastructure Cess, which is not shareable
per cent levy on energy companies to ease	with states.
the financial burden on millions of house-	Additionally, the decision to provide a
holds amid raging inflation.	subsidy of ~200 per gas cylinder (up to 12
As a temporary policy, the tax would be	cylinders) to over 90 million beneficiaries of
phased out "when oil and gas prices return	Pradhan Mantri Ujjwala Yojana will lead to
to historically more normal levels", with a	revenue foregone of ~6,100 crore a year for
sunset clause written into the legislation,	the exchequer.
Chancellor of the Exchequer Rishi Sunak	Apart from the ~1.10 trillion increase in
said. Other countries such as Italy and	fertiliser,whichhasbeenalreadyannounced,
Hungary have also imposed this tax.	the Modi government's decision to extend
	the PM Garib Kalyan Anna Yojana till
Will such a tax be imposed in India?	September will increase the food subsidy
A top government official told BUSINESS	outlay for FY23 to ~2.87 trillion from the
STANDARD on condition of anonymity that	Budget Estimate of ~2.07 trillion.