Within a few minutes of the opening bell, three steel shares hit the lower circuit today. These three stocks are Tata Steel, Steel Authority of India (SAIL) and JSW Steel. The central government's announcement to calibrate custom duty on raw materials for iron and steel products by reducing import duty on some steel products and levying export duty on others has probably not gone down well on Dalal Street.
Tata Steel share price today opened with a downside gap of nearly 73 per share and went on to hit the lower circuit at 1053.20 apiece levels on BSE. SAIL share price nosedived in early morning deals and hit a lower circuit placed at 74.70 levels on BSE. Similarly, JSW Steel's share price opened under huge selling pressure and hit the lower circuit at 567.80 per share levels.
The report says, "In a bid to curb inflation, the Ministry of Finance announced export duties on most steel products, along with an excise duty cut for petrol and diesel." This is likely to divert more supply towards the domestic market. With prices now being guided by the export parity philosophy (instead of import parity), it could lead to a sharp correction in steel prices in India. Lower coking coal and iron ore prices and a tighter global balance are unlikely to offset this. Hence, we cut our estimates across our steel company coverage and downgraded all three stocks: Tata Steel, from BUY to UNDERPERFORM; JSW, from UNDERPERFORM to SELL; and JSPL, from BUY to OUTPERFORM. " However, the CLSA report maintained that the decision augurs well for cement and consumer durables.
Explaining the reason for the sharp fall in steel stocks today, the ICICI Security report says, "The Indian government has imposed export duties on steel, steelmaking raw materials, and intermediaries to preserve higher domestic supplies and control rising prices." Most of the exports of steel and stainless steel will attract a 15% export duty now (from nil earlier). We see this as an extremely negative development for the steel sector and expect broad-based multiple de-rating. We downgrade steel and stainless steel equities under our coverage to either HOLD/REDUCE/SELL. We downgrade Tata Steel, JSPL, JSW Steel, and SAIL to REDUCE. "
"The government announced it will calibrate customs duties on raw materials for iron and steel products by reducing import duties on some steel products and levying export duties on others. "Iron and steel" is one product category where India has been running a trade surplus for the past two years. In FY22 and FY21, the trade surplus stood at USD 10.3b and USD 3.8b. India’s import dependence on ‘iron and steel’ has come down over the years and stands at only 2.1% of total imports in FY22, down from 2.8-3.6% over FY06-16. In fact, India’s ‘iron and steel’ exports constituted 5.5% of total exports in FY22 – the highest at least since FY04, "domestic brokerage Motilal Oswal said in a note.
Santosh Meena, Head of Research at Swastika Investmart Ltd, said, "To curb the inflationary pressures, the government has decided to levy an export duty on iron ore and steel while reducing the import duty on coal." This will lower steel prices, which will be beneficial to industries like infrastructure and real estate. However, steelmakers are not happy with the move as their current expansion plans were based on the assumption of growth in global as well as domestic markets. The 15% export duty on flat steel will make Indian steel prices less competitive globally, and most of the steel producers are not sure whether the domestic market will absorb the extra production. All these factors will force the steelmakers to evaluate their future plans. "