The recent safeguard duty imposed on hot-rolled coil has created a hot debate and stirred a hornets’ nest among import-dependent manufacturers. They term the imposition as one of the most injudicious measures considering its implications and the resultant production cost escalation across an extensive spectrum of sectors. The Dollar Business takes a look into the many questions raised about what is justifiably a questionable decision.

Satyapal Menon | December 2015 Issue | The Dollar Business

Call it clairvoyance or deciphering the writing on the wall, one aspect that emerges out of the rather convoluted reasoning applied for protecting domestic steel producers in the country from predators is all poised to boomerang, with resultant ramifications spreading across a wide array of industries, except those which the government is attempting to shield. While the order of the day for policymakers is to look at the big picture, it seems in this case they missed the forest for the trees. The so-called safeguard duty being imposed on import of some steel products – considered a crucial component that accelerates the wheels of industrial development – may in all probability stagnate or reverse the process. There is a surfeit of pointers to what the safeguard duty is leading up to, with the cascading 20% (safeguard duty) cost escalation becoming one of the many deterrents to production dynamics. The end users are literally paying the price for policies like safeguard and anti-dumping duties (ADD) in case of hot-rolled coil, which could in the near future prove to be irrational and regressive.

Lopsided Criteria?

Sample the very basis of safeguard and ADD and the method followed in imposing this additional burden. That the process was conceived by the WTO does not lend it sanctity or sanity, which in fact The Dollar Business had highlighted in one of its earlier issues. The decision to impose ADD and safeguard duty is taken on the basis of applications from industries which cumulatively or individually account for 50% of the total domestic production of the product under consideration. The policy is implemented irrespective of whether the application comes from one or many industries, as long as they meet the 50% criteria. Now let us, for instance, consider a scenario of a monopoly which contributes to 75-80% of the domestic production of a product, with fringe players contributing to the remaining production. All it requires to prevent any import is an application by the dominant domestic player in India to impose additional duty, so as to protect its own monopoly over the price and the domestic market. Investigations into the market and production equations and consequent financial implications on hot-rolled coil (HRC) has unraveled intrinsic discrepancies and rather perplexing factors. Considering its importance and extensive utility in a majority of both accessories’ and finished products’ industries, immense thought needs to go into taking decisions related to procurement and pricing. Unfortunately and for reasons which are not wholly inexplicable – a forethought on repercussions of such measures should have been on the agenda of the government. 

That such decisions are conceived and implemented on the premise of logic, which does not always hold water, is evident on an in-depth scrutiny of just two cases in point, out of the many that have been affected by the safeguard measures – hot-rolled coil (HRC) under HS codes 72083940 (strips of flat-rolled products in coils of thickness less than 3mm and 72083990 (other flat-rolled products in coils of less than 3mm). Interestingly, India is both an importer and exporter of these and some other products under the umbrella of HS code 7802 (flat-rolled products of iron or non-alloy steel of a width of 600mm or more). Ironically, the predicament of the domestic HRC producers and its aftermath in the form of safeguard duty has its genesis in India’s dwindling exports and increasing imports during the last and current fiscals.

Up, Up & Away

Five months into the current fiscal (April-August), India’s overall exports under HS code 7208 valued at $319.41 million is headed southwards, and considering the past trends, it is expected to culminate at exports of $768 million by the end of this fiscal. That will mark a y-o-y decline of around 44% (in FY2014-15 exports was $1.35 billion). Alarmingly, India’s imports under the same HS code is however following a different trajectory.

In the first five months of the current fiscal, imports under HS Code 7208 rose – and quite briskly at that. Total imports this fiscal is estimated to overshoot the FY2014-15 value of 1,405.43 million by around $800 million (to about $2.22 billion), marking a rise of 57% .

In terms of quantum, India’s exports at 492,639 tonne during the five months of the current fiscal show a downward trend compared to 2,278,032 tonne during FY2014-15, while imports at 1,991,909 tonne during FY2015-16 (April-August) are on the fast track considering the fact that it has already reached 85% of the quantum registered in entire FY2014-15 which was 2,355,103 tonne.

India’s imports under HS code 72083990 (Other flat-rolled products in coils of a thickness less than 3mm hot-rolled; the second-highest imported product at the 8-digit HS Code level) at $213.70 million during the first five months in the current fiscal is already catching up with the $231.71 million recorded during the entire FY2014-15. On the other hand India’s exports of the same product crashed to earth, with exports falling almost 100% from $190.26 million to $0.01 million during the first five month of FY2015-16! And this is where the idea of safeguard duty originated. India’s mandarins (may be owing to pressure from the biggies in the steel sector) were of the view that the only option to extricate the steel manufacturing industry from its turmoil was to create domestic market space for the beleaguered. [Or, they genuinely couldn’t believe their eyes and ears when they were told that India’s second largest produce at the eight-digit level (falling under four-digit level 7208) had been reduced to “nothing”!] So much for their altruistic decision and love for the domestic steel sector. But they perhaps failed to understand the situation of the global market, which for the past few months has been experiencing slackening demand and slide in prices.

Questionable Impact

The question to be answered here is how safeguard duty can be used to ensure that domestic producers start making inroads into the importers’ markets in India with domestic prices on the higher side vis-à-vis global prices.

HRC accounted for 2.25 MMT, i.e. 25%, of the total steel imports of a little over 9 MMT into India during FY2014-15. Going by the upward trends since its imposition in September, the safeguard guard duty has had little or no impact on the fortunes of domestically produced HRC. According to reports, imports have continued the upward movement despite increase in prices, thus providing little or no respite till date to domestic HRC manufacturers. Factoring in both the quantum of HRC imports and also continuing procurements from China, Japan and South Korea post safeguard imposition, the trend clearly reflects India’s preference to continue sourcing from these countries.

] Hot-rolled coil is an essential raw material used by a large number of SMEs in India engaged in the manufacturing of steel products.

According to industry sources, China continues to be a big draw for Indian buyers because of its capability to export at prices which are lower – even after including 20% safeguard duties plus 12.5% anti-dumping duty imposed on the country – than domestically produced HRC prices. And projections are that import prices would continue their journey south, with China’s domestic markets demand reflecting a downtrend and the country looking to push its existing surplus into India at irresistible prices. According to latest available data, HRC in China is trending at $269-$300 per tonne, while it is reported to be priced at $492-$508 in India. Even after adding landing cost, basic duty and the safeguard duty, the price per tonne of HRC imported from China would work out to $439 per tonne. Even with all valuations, permutations and combinations, the bitter truth of the glaring gap in prices between domestically produced steel and Chinese HRC cannot be camouflaged by policy-based trade barriers like safeguard duties.

So, the big question here is – why should Indian importers of HRC prefer domestically produced steel, when cheaper options are available? The imbalance in pricing is not just about China in isolation. In fact, India’s price is much higher that two of its biggest importers, Japan and South Korea. Evaluation of the July 2015 price data for HS code 72083990, indicates that imports to India from Japan was valued at $426 per tonne while that form South Korea and Russia was valued at $408 and $374 respectively. India’s exports under the same HS code to Italy, UAE and Vietnam ranged from $522 to $535 per tonne!

All these equations point to a gross mismatch in pricing of Made in India HRC and those of countries exporting to India.

Arresting Downfall

Delving deeper into the issue, the irrelevance of such policies becomes more and more pronounced and conspicuous. First, the rationale attributed to the imposition of safeguard duty defies logic, i.e, decline in market share of domestic producers since FY2013-14 and the projection that it would dip further from 45% to 37% during FY2015-16. There are many factors that have impacted the decline in market share, not just the import prices. If only the government had the foresight and insight to examine the reasons before coming out with predictions about the predicament of the domestic producers. It is obvious that domestic prices – except for some minimal and insignificant downside reported this year from an escalated price during previous fiscal – does not indicate any signs of coming down to the level of China, South Korea or Japan. Attributing the production cost difference to the prevailing price of iron ore cannot be justified, since the difference between the international prices ruling the market at around $50 per tonne is almost at par with India’s prices which is at Rs.3,050 per tonne. [1.6 tonne of iron ore – or Rs.5,000 worth of iron ore – goes into the making of a tonne of steel. The per tonne market price of HRC being Rs.30,480 meaning that raw material accounts for just 16% of the cost of production!]

These facts apart, there remain many questions that need to be answered. First, going by the state of financial distress caused by indebtedness of steel majors in India, the outlook is that even with increased market size, prices are only going to rise to salvage the domestic industry from its liabilities. Second, the near future scenario – global demand, supply and price patterns and trends – reflect further decline in prices. Third, China’s imports are becoming cheaper by the day due to oversupply in their backyards.

The price differential between domestic and imported steel will only rise in the months to come. So, does that mean that safeguard and anti-dumping duties will rise in tandem every time the difference between domestic and import prices widen? In keeping with its track record of treating the symptom without understanding the ailment, will the government do that? We hope better sense prevails, with the government incentivising productivity and efficiency instead of creating trade barriers.

“Safeguard Was Imposed Ex-Parte Without Following Principles Of Natural Justice” - H. L. Bhardwaj Secretary General, Federation Of Industries Of India (FII)

H.L. Bhardwaj Secretary General, Federation Of Industries Of India (FII)

TDB: There are allegations that despite being aware of repercussions and consequences on the import-dependent sector, and also the ultimate consumer, the government went ahead with the safeguard duty without giving the mandatory time for representations from those opposed to the measure? Why was there so much haste in imposing the duty? Do you think the government had succumbed to the pressures of powerful lobbies to implement the measure?

H. L. Bhardwaj (HLB): Yes, the government is believed to have acted in haste and under some pressure. We are of the view that certain forces have definitely pressurised the authorities to pursue the matter with such a haste, otherwise the authorities could have waited for the mandatory 30 days of time for representations from all interested parties before recommending provisional safeguard duty. This amounts to ex-parte decision without following the principles of natural justice.

TDB: Imposition of safeguard duty does not seem to be making any impact as imports into India continue to surge and indicate increasing trends contrary to expectations of demand for domestically produced hot-rolled coil (HRC) scaling up? What is your analysis of this trend post safeguard duty?

HLB: Contrary to the expectation of the main producers, and that of authorities, imports of hot-rolled coil have not stopped. Foreign suppliers have reduced prices to absorb part of the safeguard duty levied by the government. Further, we foresee that the demand for hot-rolled coils from domestic manufacturers will not increase since the increase in import of downstream products will dampen the overall demand for hot-rolled coil in India. The domestic HRC consumers are apprehensive of domestic steel producers increasing prices of HRC in the future. Domestic HRC consumers are therefore playing it safe by importing it to bridge the demand-supply gap.

TDB: How is it that China is being able to produce hot-rolled coil at a price much lower than that in India? Can it be attributed to raw material costs, low cost-technologies, apart from cheap labour? If so, could you give us an idea about the differentials in production costs between the two countries?

HLB: We don’t believe that China is able to produce hot-rolled coil at lower variable cost than India. Tata Steel was always considered to be the producer of steel at lowest cost. It is no secret that iron ore prices and coal prices, apart from oil prices, have a significant impact on the cost of producing steel. Global prices of all these have come down drastically during the last one and a half years. Thus, it’s natural to expect prices of steel to have moved southwards. It cannot be denied that low cost technology, bulk production has a bearing on cost of producing steel. The differential in production cost, if any, can be attributed to government policies and failure to adapt to changing situations by Indian steel manufacturers.

TDB: Can you give us an idea of the size of imports compared to domestic procurement by the industry?

HLB: The domestic hot-rolled coil consumers by and large prefer to procure it from the domestic steel producers. Compared to domestic procurement by industry, the size of imports has been mentioned in the recommendations of Director General (DG) of Safeguards for provisional safeguard duty itself at 12% of the total demand. We have to, of course, look deep into factors that force domestic steel consumers to opt for imports which is not hassle-free.

TDB: In your view will the safeguard duty force import-dependent manufacturers to source hot-rolled coil from domestic producers?

HLB: There is no doubt that part requirements of hot-rolled coils will definitely be sourced from domestic producers at a higher cost but a part requirement will still be imported due to non-availability from domestic producers. It is anticipated that many units may have to be closed down since their finished products will directly be imported into India.

TDB: Safeguard duty would result in the inevitable increase in production costs. What could be the percentage or extent of cost escalation and burden on import-dependent manufacturers?

HLB: It is difficult to assess the cost escalation. However, as more than 90% of total cost of production is the cost of steel itself, the imposition of 20% safeguard duty will increase the cost of production substantially. The escalation, however, is subject to the movement of steel prices in the international market.

TDB: Is the domestic steel producing segment equipped to meet the specific technical requirements for the manufacturing of a wide range of industrial components, accessories and products?

HLB: Hot-rolled coil is an essential raw material used by a large number of SMEs in India engaged in the manufacturing of cold rolled steel products, steel pipes & tubes, automotive and consumer durable components and many other downstream products, sustaining millions of jobs. There are companies which import certain HR grades due to their limited availability in India as well as for quality reasons. These HR grades include alloy grades and special grades which are imported based on specific technical parameters. Hot-rolled coils in thickness lower than 1.60 mm is not available domestically and has to be imported to meet the demand. The requirements for steel of various industries are widespread and the domestic steel producers are not equipped to cater to all of them.

TDB: In terms of quality, what is your rating of China’s HRC – low priced-low quality, low priced-high quality or high price-low quality? Taking these parameters into consideration, what is your evaluation of domestic HRC and does it match the imported products in terms of quality?

HLB: As far as the quality of China’s hot-rolled coil in general is concerned, it can be said that in every country there are quality conscious people. In India also it is difficult for any other producer to match Tata Steel’s quality and consistency. In India, there exist ‘steel mills’ where steel is produced without much adherence to the standards. Similarly, in China also there are mills which produce good quality steel and there are other mills which may not be so quality conscious.

TDB: Do you think that domestically produced hot-rolled coil is over-priced because of which the industry is preferring imports over procurement from domestic industry?

HLB: Yes, we do think that hot-rolled coil in India is overpriced and that is why the industry is fulfilling some part of the total demand through imports. It should also be remembered that out of the 12% import (of total demand) a major portion is covered by steel which either is not available or has very limited production in India. This 12% import also includes steel which is exported after reprocessing. In open market, where the world is considered to be one big single market, the demand and supply should be allowed to rule prices. Artificial barriers like safeguard duties are always counter-productive when imposed on raw materials and when a similar protection is not provided to the final downstream products simultaneously. All downstream industries consuming hot-rolled coil will find it very difficult to survive as they have to compete with cheap imports as against rising cost of production pushed by rise in hot-rolled coil prices by the domestic manufacturers and may result in ‘kill masses and protect few’ scenario. Another aspect is that the safeguard duty will also have a very serious impact on transactions which were contracted long before the date of notification and for which supplies were made thereafter.