India’s steel industry had been settling into a comfortable groove. The distressed assets tag for the industry is being addressed, with buyers interested in most large steel assets. Overall, demand is improving, prices are rising and new capacities have stabilized. In fact, the going was to get better as private investment demand is primed to recover in FY19 and beyond.

But the US president’s move to impose tariffs on steel and aluminium threatens to upset this calm. The government intends to impose a tariff of 25% on steel and 10% on aluminium, citing national security but the real reason is to increase domestic production. The final tariffs and any other measures to prevent imports will be known when the orders are signed.

Now, India is a significant producer and consumer of both metals, but is not a heavyweight in the export market. For instance, the Indian government said that India’s share of US steel imports is only 2.4%. That is true. And it is only 2% in aluminium. That implies the impact would be negligible. But it’s not so simple, for two reasons.

Firstly, the US decision threatens to upset the trade flow in these metals. In 2016, the US met nearly two-thirds of its aluminium consumption from imports, and about a fourth of steel. The government wants to change that and increase the share of locally produced metal.

If the US increases its output, the world is left with more metal than it anticipated. The countries exporting to the US are likely to look at other markets to sell their surplus, even at lower prices. The threat to prices could also come from exporters cutting prices to nullify the tariff impact to an extent. Again, the final tariff rates should throw light on this aspect.

It would be safe to say that the risk of prices coming under pressure will increase once the tariffs come into play. Various countries are threatening counter tariffs, which is yet another risk.

If global steel prices decline, it will affect prices in India as well. We do have protection in the form of anti-dumping duties but that is not as good a shield as the beneficial impact of rising steel prices worldwide. A reversal is bound to affect realizations.

Secondly, India may be a relatively small participant in the global export market but its exports have risen sharply in absolute terms.

Domestic output has been increasing on the back of capacity additions but India’s consumption has not kept pace.

In April-January 2018, for instance, our steel exports rose by 40.2% and we were a net exporter of steel. In aluminium, production rose between FY14 and FY17 from 1.4 million tonnes to 2.8 million tonnes, according to a Care Ratings report, but consumption rose from 1.6 million tonnes to only 1.9 million tonnes. That led to a sharp jump in exports of 57% in FY17.

While the government can protect domestic producers from cheaper imports, they are on their own in the export market.

A fall in global prices will directly affect export margins.

The details of the final tariffs and the retaliatory measures taken by other countries should be awaited, to get an idea of how bad it looks. It is risky to assume that India’s industry will not be affected as they are not dependent on exports. The aftershocks of what is happening in the US will be felt here, even though the extent of the impact will be known only later.

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