The Minimum Import Price fixed by the government has come as a breather for the steel industry weighed down by rising imports and slowing demand. Seshagiri Rao MVS, Joint Managing Director and CFO, JSW Steel, spoke to BusinessLine on the impact of MIP on the industry. Excerpts:
Has MIP helped the industry?
The Minimum Import Price is a very good step by the government. It covers 173 items and almost 80 per cent of current imports. We have to wait and watch to ensure there is no circumvention. The industry is concerned with the issue of revolving Letter of Credit (LC), which is a new term in the financial market. For instance, a LC is opened for $2 million, but one can revolve it 10 times, so the overall value is $20 million — validity is one-and-a-half years. That means, the three conditions that cannot be changed under MIP — value, validity and quantity — will be met and the import restriction can be circumvented. The clarification issued by DGFT (Directorate-General of Foreign Trade) is not clear on how revolving LCs will be tackled.
Whether big or small, we are all part of the same supply chain. We are not each others’ enemies. Whatever imports are coming in, are not competitive. They are coming at prices lower than the exporting countries’ domestic prices or implied subsidies by their respective governments. If the government had not taken the action, steel industry in India would have been closed. After this, will the import prices — which are transient in nature — continue to remain same or increase? Several examples were given, such as what the chain has done in the case of bulk drugs and penicillin to kill the industry and increase prices 10-13 times. The government’s steps to moderate imports are in the interest of the whole industry.
Why have steel exports been falling?
In FY’15, we exported 3 million tonnes; this year, it has halved to 1.6 million tonnes. There are many reasons for the industry to remain uncompetitive in the global market. The taxes paid by the industry are close to $35-40 per tonne. When we export, the benefit of duty draw-back is $6-8 a tonne. If the taxes are so high, how can we compete with China? Same is the case with logistics. If I have to send my material from Bellary plant to Bengaluru, I pay ₹1,200 a tonne. Whereas, it will cost much less if I bring iron ore from Australia to India. So, there are lot of imbalances that are pushing up the cost. In India, the costs and taxes are very high. These are the issues both the user industry and steel companies should focus on.
How much can the steel prices go up after MIP?
A lot of eyebrows went up when the MIP was fixed at $445 a tonne. This is the price at which HR coils are sold by Japanese and Koreans companies in their domestic markets. If you add implied subsidies, the Chinese prices will reach this level. This price was arrived at after imposing safeguard duty. In India, the market forces will determine the prices. In my view, it is unlikely that prices will move up to the MIP-level unless supply-demand dynamics change with robust demand. Again, rupee-dollar will play a major role. Technically, Japanese and Korean companies are making money only because of their currency advantage.
What is the difference between domestic and international prices?
While making a comparison, we have to exclude the taxes. Normally, people pick up the selling price of ₹32,000-a-tonne, which includes excise, VAT and transportation cost. Indian steel has a premium of ₹500-1,000-a-tonne over imports. If somebody wants to import, he is taking a dollar risk. If you consider the dollar volatility, the premium for forward contract is 7 per cent. So the premium reflects the currency risk; the cost involved to open LCs three months in advance and the working capital gets tied up as they have to import in large lots. If you assign all these costs, then the premium of at least ₹1000-a-tonne is justified.
Why did the government give priority to MIP on steel, against aluminium?
It is all data driven. We collected numbers from various sources and presented it to the government, for the past several months. Collecting data is a tedious task. Data released by the DGFT comes with a three-month lag. So we collected data from the ports directly. We moved for safeguard duty, anti-dumping duty and MIP. Based on our own estimate, the steel industry has suffered a loss of ₹12,000-15,000 crore in the third quarter alone, just because of imports. The Chinese Steel Association has said its steel companies are losing $11 billion at the operating level, for the past 11 months. It clearly shows nobody is making money.