Metal producers witnessed renewed buying interest on Monday after it was reported that the government will soon notify imposition of safeguard duty on some steel products.
While all metals and mining stocks rallied, Tata Steel, Jindal Steel and Power and JSW Steel each added more than 3% in Monday’s session to close at Rs 241.3, Rs 64.10 and Rs 992.60, respectively. Ever since the directorate general of safeguard duty recommended a 20% safeguard duty on import of several products, including hot-rolled coils for 200 days, steel stocks have added anywhere between 7% and 12%. The measure was considered after the steel industry urged the government to take steps to counter the impact of a sharp jump in imports from China, Japan, Korea and Ukraine amid plunging global steel prices.
Amid anemic local demand, the onslaught of imports has impacted revenues and profits of most domestic players. In the quarter ended June 2015, JSW Steel, SAIL and Jindal Steel & Power all reported net losses. According to JPMorgan, imposition of safeguard duty is very positive for Indian flat-rolled manufacturers like Tata Steel, SAIL and JSW as it allows these producers to push higher volumes as well as increase prices.
“Given that the safeguard duty imposition would be applicable to Japan and Korea, we estimate that it will eventually open a window to raise prices by Rs 2,000-2,500/t over the coming months as imported inventory declines,” said analysts Pinakin Parekh and Neil Gupte in a note.
While since June the government has increased import duty on various steel products by 5%, the industry was of the opinion that more stringent steps were necessary. After the annual general meeting of Tata Steel on August 12, TV Narendran, MD, India and South East Asia, had suggested that safeguard duty may act as a deterrent as import duty hikes have short-term impact on speculative booking (imports). However, the same is not good enough for long-term structural issues that capital intensive Indian steel producers are facing. “We are requesting the government to investigate and apply safeguard duties retrospectively, if there are breaches on quality and steel is being dumped,” said Narendran.
While the ministry of finance is required to approve the suggested safeguard duty, analysts believe that there is a strong case for such an approval to come soon. Citing a similar instance of safeguard duty on aluminium products in 2009, Bank of America Merrill Lynch said the case for imposition on steel products is much stronger this time around.
“In both cases, imports had led to a declining market share of domestic producers and they started making losses.
However, while aluminum rolled product capacity utilisation had started to fall, in the case of steel, capacity utilisation is stagnant, but inventory is increasing,” said the foreign brokerage house in a research note dated September 14.
It added that an imposition of safeguard duty would likely raise steel prices by 7-8%, which, in turn, could lead to 35-40% and 20-25% upgrade in consensus Ebitda estimates, respectively, for SAIL and JSW Steel.
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