The Hindu Business Line : A mixed bag

THE Budget is a mixed bag for the steel industry. While there will be an increase in steel demand due to the overall thrust to promote infrastructure development and rural housing, the industry is worried that the increase in prices due to the hike in excise duties may affect user industries and end consumers.

The user industry had already threatened steel manufacturers with the damaging prospect of a backlash. Steel companies were also worried that the rising prices would make their product uncompetitive in comparison to other metals and alternatives to end-use steel, even as they revelled on the impact that the higher steel prices had on their bottomlines last year.

With the demand for steel internationally not showing any signs of slackening and raw material prices still remaining firm, the industry may not absorb the impact of the 4.24 per cent increase in excise duty payable by end users on their products.

The inflationary effect of this hike in excise duty will, as a result, have the biggest impact on steel products whose users do not have the benefit of claiming Modvat credit. Nearly 40-45 per cent of all steel sold in the domestic market is of products where Modvat is not available. This segment is dominated by long steel products sold to housing, mini-infrastructure projects and fabricators segment. The likely impact due to the increase in excise duty could be in the region of Rs 800-Rs 1,000 per tonne.

The steel industry is planning a near doubling of capacities in the next six years. Any measure to promote and increase consumption in the domestic market will, therefore, be welcome for the manufacturers. But price stability continues to worry the industry, even as there are some signs this year that the buoyant demand from China, which held out the prospects of a sustained increase in exports last year, will continue.

The Budget has also slashed the import duties applicable on a whole range of steel products. On the one hand, this could be a move to accelerate the integration of the Indian steel industry with its global counterparts. It may also be the safest time to effect such a move, as there are signs that the growth momentum in domestic steel consumption can be sustained and the prices of steel may stabilise at the current levels for the next couple of quarters.

However, the industry also feels that the cut in duties — particularly that of finished steel — despite the addition of a countervailing duty may still make imported steel more competitive in the long-term when prices head southward. This could also have a bigger impact on steel companies whose cost of funds are still high, as a result of which their competitiveness is being dragged down.

Many of them are as yet paying back their expensive borrowings at higher-than-market interest rates to the financial institutions.