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Post the removal of export curbs, Indian steel makers have been looking to capitalise on the demand revival in automotive, consumer durables and real estate to push sales. However, their exuberance was short-lived, it seems, as they are now faced with a new headache: increasing imports of low-priced steel.

That is cutting into their domestic market shares and dampening profitability prospects. This will adversely affect their capex plans at a time India’s manufacturing sector is not doing well. Gross value added (GVA) in manufacturing contracted 4.3 percent (YoY) in the July-September quarter, and the near-term outlook doesn’t look promising amid a worsening global macroeconomic environment that will cap exports.

Amid monetary tightening by major central banks to rein in inflation, and slowing GDP growth in most of the developed world and China, the largest steel consumer globally, the demand outlook for this key industrial input remains bearish. To offset lower exports to Europe and the US, steel manufacturers from Japan, South Korea and Vietnam are offloading their excess output in relatively better-performing markets such as India, often at whatever prices they can fetch.

No wonder, the landed cost of benchmark hot rolled coil (HRC) of Japanese origin is Rs 48,000 a tonne when domestic HRC prices are hovering around Rs 56,000 a tonne, leading to a loss of market for competing Indian manufacturers. The average capacity utilisation in the country’s steel sector was 78 percent in FY 2021/22. However, due to increased imports amid muted domestic and global demand, capacity utilisation has been falling and may fall further if the problem of cheaper imports is not dealt with effectively.

Indian steel manufacturers suffered a loss of revenues and profits when the government imposed a 15 percent duty on steel exports to improve supply in the domestic market and rein in prices, even though a surge in the prices of key inputs especially coking coal and iron ores was the major cause for rising steel prices rather than increased demand. Thus, those export curbs were a bad regulatory move. They have been lifted now, but it is of little help in a weakening demand scenario.

To make matters worse, domestic steel manufacturers have to deal with increasing unfair competition from low-priced imports. Given this backdrop, the Indian Steel Association (ISA) has reportedly approached the Ministry of Steel to seek an investigation into the dumping of steel products. If the government finds proof of dumping that is causing serious injury to the indigenous steel industry, it can levy anti-dumping duties which are permitted by the global trade body, World Trade Organisation (WTO).

Many argue that cheaper steel imports, whether fair or dumped, help downstream industries such as automotive or real estate and hence should be tolerated if not encouraged. However, promoting downstream industries doesn't mean the government should allow unfair trade competition. Helping the domestic steel industry become cost-efficient is the best way to help downstream industries on a sustainable basis. This can be achieved by removing import duties on key inputs such as coking coal that is almost entirely imported. With enough players operating in the domestic steel industry, both private and state-owned, free market competition should be entrusted to ensure competitively priced steel, or any other major industrial inputs, for that matter.

The same applies to the well-intentioned export curbs that are meant to help downstream users of steel. The cost-induced price hikes should be allowed to be passed on to steel buyers. Otherwise, that will affect future supplies and make it increasingly difficult to manage prices of something as important as steel, a common industrial input.

Export curbs may help downstream industries in the short term, but over the longer-term stopping manufacturers from making profitable sales, whether domestically or in overseas markets, disincentivises investment in the sector and adversely affects future supplies. That hurts the same set of customers or downstream industries for whom they have been imposed, in the first place.

Similarly, export curbs on iron ores may help steelmakers in the short run but on a longer-term basis, it will discourage investment in iron ore mining and cap future supplies of raw material. That will hurt steelmakers. This is Economics 101. In the same way, the imposition of a market-distorting minimum import price (MIP) to please steel lobbies is a bad idea and should best be avoided. A stable and predictable regulatory regime is the necessary prerequisite for promoting investment and in turn economic growth.

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