Steelmakers brace for margin squeeze as states mull new cesses post-SC ruling, Icra says

  • Steelmakers face up to a 2% margin squeeze due to potential new state-imposed mining cesses.
  • The uncertainty of retrospective cess application poses additional financial risks for companies, though a SC provision for staggered payments offers some relief.

Manas Pimpalkhare
Published26 Aug 2024, 06:45 PM IST
Steel prices in India have fallen to a three-year low, indicating increasing stress for domestic producers in a market that has been a rare global bright spot. (File Photo: Bloomberg)
Steel prices in India have fallen to a three-year low, indicating increasing stress for domestic producers in a market that has been a rare global bright spot. (File Photo: Bloomberg)

Operating margins of primary and secondary steelmakers could shrink by approximately 2% due to the introduction of new cesses by some states following a recent Supreme Court ruling, according to credit rating agency Icra Ltd.

Icra said that primary steel producers may see a reduction of 60-180 basis points in operating margins, while secondary steel producers could face a steeper decline of 80-250 basis points (one hundred basis points equal one percentage point).

The impact of these new cesses could extend beyond the steel industry, potentially affecting the power sector and aluminium manufacturing, Icra noted. The agency also highlighted concerns about the possibility of states applying the cess retroactively, which could impose additional burdens on companies with existing tax liabilities.

This outlook follows Supreme Court rulings on 25 July and 14 August, which upheld the states' authority to levy taxes on mining activities within their jurisdictions and allowed for these levies to be applied retrospectively. "This development is poised to compress operating margins across the sector, impacting both primary and secondary steel producers," Icra said.

Although state governments have yet to notify the additional taxes, experts warn that any new levies will likely erode margins for steel producers and increase costs further down the value chain. 

Read this | Green light for retro tax sends a shockwave across mining and metals companies

"The enforcement of the new mining cess by key mineral-rich states can heighten cost pressures for the steel industry. While most states haven’t set the rates yet, any substantial cess implemented could adversely impact margins, especially for secondary steel producers, as the merchant miners are expected to pass on the increased costs," said Girishkumar Kadam, senior vice-president and group head, Corporate Sector Ratings, Icra.

Odisha, a mineral-rich state, serves as a key example. The state has legislation permitting a 15% cess on coal and iron ore—the highest allowed for states. Icra predicted that such laws, if implemented, could reduce competitiveness within the steel sector. "If fully enforced, it could result in an ~11% increase in the landed costs of iron ore, directly impacting the cost competitiveness of domestic steel entities," it said.

The enforcement of these state laws will play a critical role in shaping the competitive landscape of the steel industry, according to Icra. "The implementation strategies adopted by various state governments will be crucial in shaping the competitive landscape of the steel industry," said Kadam.

Meanwhile, steel prices in India have slipped to their lowest in more than three years, hurt by a global supply glut caused by a weak Chinese economy flooding the international markets with its excess production of the alloy.

The ripple effects of these margin cuts could also dampen profitability in other industries, such as aluminium and power, ICRA forecasted. The power sector, heavily reliant on coal, might see a rise in supply costs by 0.6% to 1.5%, potentially leading to higher retail tariffs. 

Similarly, primary aluminium producers, due to their high power consumption, could face cost increases of approximately 1,200-1,300 per tonne ($15-$16 per tonne), assuming a 15% cess, which represents ~0.6% of current aluminium prices, Icra noted.

As the industry braces for these additional costs, a significant point of uncertainty remains: whether states will impose these cesses retrospectively, and how they will implement these new levies. 

"If the cess is applied retrospectively, it could increase financial pressure on steel companies. However, the Supreme Court’s provision for staggered payments over 12 years starting from 1 April 2026, without any interest and penalties on past demands offers some financial relief," said Kadam.

Also read | Mint Explainer: Significance of the sole dissenter in the mining tax ruling

The full impact of the Supreme Court's rulings will hinge on the actions of state governments. Companies will need to remain vigilant to mitigate financial pressures, Icra advised.

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First Published:26 Aug 2024, 06:45 PM IST
Business NewsIndustrySteelmakers brace for margin squeeze as states mull new cesses post-SC ruling, Icra says

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