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Budget 2004-05: Steel


Being a core sector, steel industry tracks the overall economic growth in the long-term. Also, steel demand, being derived from other sectors like automobiles, consumer durables and infrastructure, its fortune is dependent on the growth of these user industries. India has a per capita consumption of steel of around 30 kgs as against 180 kgs in China and an average of over 400 kgs in the developed countries. This wide gap in relative steel consumption indicates that the potential ahead for India to raise its steel consumption is high. Read more

 Budget Measures


  • Excise duty raised on iron and steel from 8% to 12%.
  • Customs duty has been reduced from 15% to 10% on all primary, semi-finished and finished forms of iron and steel like ingots and billets, sponge iron, hot rolled and cold rolled bars/rods/coils of non-alloy steel (other than seconds and defectives).
  • Customs duty reduced from 20% to 15% on ferro alloys, stainless steel and other alloy steel, excluding seconds and defectives.
  • The budget is silent on the restoration of the duty entitlement pass book (DEPB) scheme applicable to steel exporters.
  • A surcharge of 2% on account of education cess will be imposed on corporate tax.

     Budget Impact


  • The budget announcements are a negative for the steel sector, as the increase in the excise duty by 4% to 12% will adversely affect the bottomline, at least in the short term.

  • Further, the reduction in customs duties on certain steel products by 5% to 15% will exert pressure on the steel companies' intentions of raising prices. However, in the near-term, with international prices ruling firm, reduction in domestic prices may not be necessary.
  • Further, with no announcements made with respect to the restoration of the DEPB scheme, which the industry had expected, it has come as a setback of sorts for steel players (particularly with respect to exports).
  • The imposition of the 2% surcharge in the form of education cess is a negative for the bottomline of corporates.

     Sector Outlook


  • We continue to maintain our bearish view on the steel sector for the medium-term owing to various reasons. We believe that the steel cycle has peaked and with various domestic and global capacity expansions plans taking shape coupled with the Chinese governments efforts at cooling down its economy, this would put pressure on steel prices going forward. Indian steel majors have already announced aggressive capacity expansion plans in India. This means that any shortfall in the demand from China will lead to overcapacity in the Indian context. While steel demand in India is expected to grow in the region of 4% to 5% in the near future, it may not be able to absorb the capacity additions expected in the future.


     Industry Wish List


    Tisco - Mr. Nandrajog (VP - Finance)
    (excerpts from a detailed pre-budget wish-list provided by the company)

  • Export benefits: DEPB benefit on exports should be restated. Further, Export promotion for Capital Goods (EPCG) Scheme is an incentive for exporters. The system need to be simplified on similar lines as DEPB Scheme. It will help faster processing of documents and release of goods at the Ports.

  • Value Added Tax (VAT): Implementation of "Value Added Tax" (VAT) with corresponding reduction in Central Sales Tax (CST), as envisaged in the proposal, needs priority. This will also mean abolition of Entry Tax (4% - 5% on designated input materials) which many states, including Jharkhand, have imposed.

  • Reduction in Railway Freight: Inspite of good quality of limestone available in the Country especially Rajasthan, the landed cost of limestone become uneconomical compared to the imported ones. This is mainly due to very high railway freight (almost 300% of the cost of material) paid for the rail movement. This makes the entire deal uneconomical. We therefore, seek support of Indian Railways and assistance from Ministry of Steel, to cut down the railway freight to make the indigenous limestone economically attractive.

  • Tariff protection: In view of the high infrastructure costs and high interest rates, tariffs have to be commensurate, to make the Indian steel industry competitive. Tariffs need to be in place so long as infrastructure development remains inadequate in the country. It may be noted that countries, which have reduced tariffs, have alongside provided safeguards to prevent unhealthy competition from cheap imports. The Chinese market, which has mainly been behind the current revival of the world steel industry, is showing signs of slowing down. There is an apprehension that this may drastically affect world steel prices in future. In view of the foregoing, it is strongly recommended that customs duty may be maintained at the current level upto March 2006.


     Budget over the years


    Budget 2001-02 Budget 2002-03 Budget 2003-04
    Surcharge on customs duty reduced.

    Steel purchased for Gujarat relief work to be exempt from Excise duty.

    Higher outlay on infrastructure projects.

    Custom duty on seconds and defective (on hot rolled coils) increased to 40% from the earlier 35%.

    Custom duty on ship breaking scrap increased to 15% from the current 5%. CVD (counter veiling duty of 16%) and SAD (special additional duty) are exempted.

    Custom duty on graphite electrode of size above 24'" reduced to 15% from the earlier 25%. Custom duty on refractory raw material (micro silica/fume silica) reduced to 25% from the earlier 35%.

    Finance minister reaffirmed the thrust on infrastructure development by announcing new infrastructure projects.

    Peak customs duty reduced from 30% to 25%.

    Decrease in freight rate by 5.3%. Confessional freight for short distance transportation.

    Tax sops maintained for the housing sector.

    Surcharge on corporate tax halved from the current 5% to 2.5%.

    [Read more on Budget 2001-02] [Read more on Budget 2002-03] [Read more on Budget 2003-04]

    Key Positives
  • The per capita steel consumption in India is abysmally low at around 30 kgs as compared to 180 kgs of China and over 400 kgs in the developed countries. This wide gap in relative steel consumption indicates that the potential ahead for India to raise its steel consumption is high.

  • Meteoric rise in steel prices during 2003 helped the domestic steel companies immensely as many of them managed to reduce their debt burden considerably, helping them either turn into profits or increase the same significantly. Going forward, the demand is likely to sustain in the current year also on the back of continuing demand from countries like China and improving growth prospects of US and Japan.

  • A robust housing and infrastructure sector, with growth potential in the auto and the consumer durables sectors is likely to be a big positive for the domestic steel sector.

  • Indian steel producers are one of the lowest cost producers in the world, which provides them a hedge against fall in prices. Further, relatively efficient and vertically integrated companies like Tisco are likely to be in a better position to weather any steel downturn.

      
    Key Negatives
  • While there have been concerted efforts to reduce the overcapacity constraints in the industry, the problem continues to persist, albeit lesser than a year or two ago. Further, the biggest threat to the industry remains from the cyclicality of the sector, which could put immense pressure on steel prices if steel demand/consumption shows signs of faltering.

  • Indian steel companies have to bear additional costs pertaining to capital equipment, power and inefficiencies (low per employee productivity). This has capped the edge they would have otherwise enjoyed due to availability of cheap labour and raw materials.

  • Another possible threat to the domestic steel sector continues to be from dumping by international companies. With wide spread capacity expansions taking place across the globe and the protection to domestic steel companies being progressively reduced with consistent reduction in custom duties, international steel companies might look at markets to dump their products. In such a scenario, Indian companies stand to lose due to lack of competition in terms of size.


    Budget Impact: Steel Sector Analysis for 2004 | Steel Sector Analysis for 2005-06
    Latest: Performance Of Steel Stocks | Steel Sector Report

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    Sector Performance
    COMPANY PRICE (Rs)
    ABC GAS 65.1
    (5.0%)
    ADHUNIK INDUSTRIES 38.8
    (-0.2%)
    AEROFLEX INDUSTRIES 142.6
    (0.9%)
    AERPACE INDUSTRIES 18.6
    (2.0%)
    ANKIT METAL 3.9
    (-1.8%)
    APL APOLLO TUBES 1,547.2
    (-1.4%)
    ASHIANA ISP. 42.2
    (1.2%)
    AURO IMPEX 75.0
    (-4.2%)
    BALASORE ALLOYS 6.3
    (0.2%)
    BANSAL ROOFING PRODUCTS 85.2
    (-2.3%)
    BEEKAY STEEL IND. 605.6
    (-2.2%)
    BHARAT WIRE ROPES 258.1
    (-2.2%)
    BIHAR SPONGE 13.0
    (-0.9%)
    BINANI INDUSTRIES 14.8
    (-2.8%)
    BLOOM INDUS. 27.4
    (3.6%)
    BMW INDUSTRIES 58.9
    (-3.1%)
    BOMBAY WIRE ROPES 53.1
    (2.0%)
    CAPTAIN TECHNOCAST 215.0
    (2.4%)
    CHAMAN METALLICS LTD. 73.5
    (-5.0%)
    CHENNAI FERROUS IND. 130.8
    (-4.5%)
    COSMIC CRF 892.1
    (-3.6%)
    CREATIVE CASTINGS 738.7
    (-1.3%)
    CRIMSON METAL 8.9
    (-4.5%)
    CUBEX TUBING 104.4
    (-2.0%)
    D P WIRES 461.0
    (-4.3%)
    DALMIA REFRACTORIES LTD. 0.0
    (0.0%)
    DE NEERS TOOLS 214.0
    (-3.9%)
    DEEM ROLL-TECH LTD. 104.4
    (-4.3%)
    DEEPTI ALLOY STEEL 37.1
    (0.0%)
    DHATRE UDYOG 21.5
    (-5.0%)
    DP WIRES 462.4
    (-4.0%)
    EARTHSTAHL & ALLOYS 45.2
    (0.3%)
    EAST COAST STEEL 27.8
    (-5.0%)
    ELANGO INDUS 10.0
    (-2.0%)
    ELECTROSTEEL STEELS 31.1
    (-4.9%)
    EURO PANEL PRODUCTS 181.5
    (3.4%)
    FACOR ALLOYS 7.6
    (0.0%)
    GALLANTT METAL 271.1
    (-5.0%)
    GANDHI SPECIAL TUBES 802.4
    (-1.5%)
    GODAWARI POWER 872.1
    (-4.0%)
    GOODLUCK INDIA 860.9
    (-2.1%)
    GOPAL IRON & STL. 7.4
    (-1.3%)
    GRAND FOUNDRY 10.5
    (0.0%)
    GRAVITA INDIA 911.3
    (-0.4%)
    GUJ.INTRUX 362.0
    (-5.1%)
    GYSCOAL ALLOYS 3.8
    (-3.8%)
    HARIOM PIPE 549.4
    (-4.2%)
    HEERA ISPAT 8.4
    (2.3%)
    HI-TECH PIPES 122.4
    (-4.3%)
    HINDUSTAN COPPER 357.7
    (-3.3%)
    HISAR METAL 195.0
    (-6.2%)
    IFGL REFRACTORIES 643.4
    (-2.8%)
    INDIAN BRIGHT 157.7
    (-2.0%)
    INDIAN METALS 662.8
    (-6.3%)
    INDSIL HYDROPOWER 51.0
    (-3.5%)
    INDUCTO STEEL 64.8
    (-1.3%)
    INVESTMENT & PREC. 638.5
    (5.2%)
    ISMT 96.8
    (-3.6%)
    JAI BALAJI INDUS 929.1
    (-3.6%)
    JAI CORP 289.6
    (-4.9%)
    JAINAM FERRO ALLOYS (I) LTD. 147.4
    (-2.4%)
    JAYASWAL NECO 48.7
    (-2.7%)
    JINDAL SAW 521.8
    (-1.9%)
    JINDAL STAINLESS 679.6
    (-2.0%)
    JINDAL STAINLESS (HISAR) 560.8
    (3.6%)
    JINDAL STEEL & POWER 922.1
    (-2.4%)
    JSW STEEL 833.4
    (-3.6%)
    KACHCHH MINERALS 35.3
    (-4.3%)
    KALYANI CAST TECH LTD. 481.5
    (-4.8%)
    KALYANI FORGE 430.6
    (1.6%)
    KALYANI STEELS 815.4
    (-3.5%)
    KAMDHENU ISPAT 510.5
    (-3.5%)
    KANISHK STEEL 33.2
    (-1.6%)
    KIC METALLICS 51.6
    (0.8%)
    KIRL.FERROUS 561.7
    (-2.5%)
    KRIDHAN INFRA 3.9
    (-1.5%)
    LESHA STEELS 17.3
    (-2.0%)
    LGB FORGE 10.0
    (-1.0%)
    LLOYDS METALS 664.1
    (-2.1%)
    M.M.FORGINGS 1,121.2
    (-4.2%)
    MAGNA ELECTR 450.8
    (-2.0%)
    MAHAMAYA STEEL 119.0
    (1.0%)
    MAHARASHTRA SEAMLESS 800.4
    (-3.0%)
    MAIDEN FORGINGS LTD. 92.3
    (-5.8%)
    MAITHAN ALLOYS 1,162.1
    (-6.5%)
    MANAKSIA STEELS 53.4
    (-2.0%)
    MANGALAM WORLDWIDE LTD. 158.0
    (-2.3%)
    MARATHWADA REFRACT 399.0
    (0.0%)
    METAL COATING 87.6
    (1.7%)
    METALYST FORGINGS 4.3
    (-4.0%)
    MEWAT ZINC 184.0
    (2.0%)
    MFS INTERCORP 9.3
    (-5.0%)
    MISHRA DHATU NIGAM 410.0
    (-2.4%)
    MODERN STEEL 21.8
    (-4.8%)
    MONNET IND. 26.0
    (-2.3%)
    MORGANITE CRUC 1,462.1
    (-0.9%)
    MSP STEEL & POWER 24.9
    (-3.2%)
    MUKAND 167.0
    (-2.7%)
    MUKAT PIPES 13.9
    (4.3%)
    N.D. METAL 103.6
    (-5.0%)
    NALWA SONS INV 3,452.8
    (0.4%)
    NANAVATI VENTURES 49.6
    (0.3%)
    NATIONAL FITTINGS 124.3
    (-3.7%)
    NELCAST. 150.2
    (-3.1%)
    NILACHAL REFRACT. 56.0
    (1.8%)
    NILE. 1,295.5
    (-0.6%)
    NMDC STEEL 60.2
    (-3.8%)
    NOVA IRON & STEEL 26.9
    (2.0%)
    NUPUR RECYCLERS 73.7
    (-2.4%)
    OM INFRA 124.3
    (-3.6%)
    ORIENT CERATECH 46.7
    (0.1%)
    OWAIS METAL & MINERAL PROCESSING LTD. 890.0
    (-5.0%)
    P.M. TELELINNKS 6.7
    (-0.3%)
    PACT INDUSTRIES 1.4
    (4.6%)
    PENNAR INDUSTRIES 124.4
    (-3.7%)
    POCL ENTERPRISES 311.7
    (-2.0%)
    POKARNA 441.9
    (-2.7%)
    PRADHIN 46.8
    (3.9%)
    PRAKASH STEELAGE 7.4
    (-2.0%)
    QUALITY FOILS (INDIA) LTD. 112.0
    (-0.2%)
    RAASI REFRACTORIES 49.6
    (-4.8%)
    RAJDARSHAN 45.8
    (-1.8%)
    RAJRATAN GLOBAL WIRE 591.9
    (-1.6%)
    RAM RAT.WIRE 370.6
    (-2.1%)
    RAMA STEEL TUBES 12.3
    (-2.6%)
    RATHI BARS 39.2
    (0.2%)
    RATHI STEEL 60.1
    (-2.7%)
    RATNAMANI METALS 3,107.8
    (-1.3%)
    RATNAVEER PRECISION ENGINEERING LTD. 124.3
    (-3.7%)
    REMI EDELSTAHL TUBULARS 89.4
    (-3.9%)
    RHETAN TMT 12.5
    (-1.7%)
    RHI MAGNESITA 594.1
    (-3.0%)
    RIDDHI STEEL & TUBE 50.0
    (-3.0%)
    RUCHI STRIPS 6.7
    (0.0%)
    RUDRA GLOBAL 36.7
    (-3.8%)
    SAIL 153.2
    (-4.7%)
    SAL STEEL 19.2
    (2.9%)
    SARDA ENERGY & MINERALS 257.9
    (-5.8%)
    SARTHAK METALS 235.2
    (-2.3%)
    SH.STEEL WIR 40.2
    (-5.0%)
    SHAH ALLOYS 61.5
    (-3.0%)
    SHALIMAR WIRE 22.8
    (-3.1%)
    SHARDA ISPAT 284.4
    (4.9%)
    SHARP CHUCKS & MACHINES LTD. 103.7
    (-6.6%)
    SHIV.BIMETAL 557.5
    (-0.2%)
    SHRI BAJRANG ALLOYS 296.1
    (-2.1%)
    SHYAM METALICS AND ENERGY 567.3
    (-4.3%)
    SIMPLEX CASTINGS 185.1
    (-2.0%)
    SP REFRACTORIES LTD. 206.9
    (-5.0%)
    SRU STEELS 9.9
    (-1.5%)
    STEEL EXCHANGE 13.6
    (-3.6%)
    STEEL STRIPS INFRA 36.1
    (1.0%)
    STEELCAST 659.1
    (-2.1%)
    SUNFLAG IRON & STEEL 200.9
    (-1.7%)
    SURAJ PRODUCTS 660.8
    (4.7%)
    SURAJ STAINLESS 304.0
    (-0.6%)
    SURANI STEEL TUBES 402.0
    (0.5%)
    SURYA ROSHNI 617.6
    (-2.9%)
    SWASTIK PIPES LTD. 75.7
    (-3.5%)
    T.N.STEEL TU 11.3
    (0.0%)
    TATA METALIK 1,090.2
    (3.0%)
    TATA STEEL 162.0
    (-2.4%)
    TATA STEEL BSL 85.6
    (-1.4%)
    TATA STEEL LONG PROD 829.5
    (0.3%)
    TAYO ROLLS 99.3
    (5.0%)
    THAAI CASTING LTD. 215.1
    (-5.3%)
    TINPLATE 430.5
    (-0.5%)
    TRANSTEEL SEATING TECH 95.2
    (-2.3%)
    TULSYAN NEC 86.2
    (-8.4%)
    UNI ABEX 2,873.9
    (2.6%)
    UNISON METALS 21.8
    (-0.2%)
    USHA MARTIN 334.1
    (-4.5%)
    VALLABH STEEL 12.2
    (-1.9%)
    VASWANI INDUSTRIES 33.2
    (-2.0%)
    VBC FERRO 42.6
    (-4.5%)
    VENUS PIPES & TUBES 2,098.1
    (-1.9%)
    VIBHOR STEEL TUBES LTD. 272.0
    (-1.8%)
    VISA STEEL 20.0
    (-4.9%)
    WELCAST 1,548.0
    (-3.1%)
    WELSPUN SPECIALTY 36.6
    (-4.9%)

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