The effect of the trade war unleashed by the US President early this year is beginning to impact the external trade numbers of countries across the globe. An analysis of the effects of the import tariff hike by the US on India’s steel sector shows that while exports have taken a hit, domestic steel prices were not impacted by the hike.
The background
President Trump invoked Section 232 of American Federal Act of 1962 and hiked tariffs on aluminium and steel by 10 per cent and 25 cent, effective March 23, 2018. Within a few months, countries such as Japan and Thailand were exempted (partially or fully) from the tariff hikes. But India could not get a relaxation despite considerable efforts to negotiate with the US.
Nine months after the imposition of new tariffs, however, there has been no direct impact on India due to the small share of our exports to the US. But an indirect impact has been felt. Global steel exporting countries, unable to export to US due to the steep tariff, have been dumping steel in India, changing the dynamics of the steel economy in the country.
Imports vs exports
South Korea, Japan and China are among the top 10 countries that exported to the US in 2017. Due to the trade restrictions, these countries have now redirected their supplies to India and other neighbouring countries.
Imports to the US from these countries in the quarter ending September 2018 fell to 0.99 million tonnes, 33 per cent down from quarter ending March 2018, during which the tariffs were introduced. During the same period, imports to India from these countries rose considerably by 55 per cent to 1.58 million tonnes.
Though overall imports dipped in the first half of the year by 6 per cent over the previous year, India has become a net importer of steel for the first time after almost two years.
If the trend continues, the Government should consider regulating steel imports into the country by increasing import levies and safeguard duties.
The uncertainties created in the global market (due to tariffs) combined with robust demand within the country have led to Indian steel companies increasing their focus on the domestic market. For instance, JSW Steel’s exports in the recent quarter ended September 2018 accounted for 17 per cent of total sales, down from 26 per cent in the year ago period. During the same period, Tata Steel’s export volumes too, declined by about 23 per cent y-o-y.
This has made India’s total exports plummet by 22 per cent in the first half of the FY19 to 4.24 million tonnes from 5.45 mt a year ago.
Domestic prices immune to global factors
Due to the hike in tariff on US imports, international steel prices declined marginally for a while but recovered on account of favourable demand for the commodity globally. Steel was trading at an average international price of $586 per tonne in April 2018, down from $594 per tonne in March 2018. But it rebounded to $598 per tonne in June 2018 and came down to $577 per tonne in September 2018. The recent downtrend is on account of seasonal impact and not due to uncertainties in the trade.
Domestic steel prices remained steady in this period. Average domestic HRC (hot-rolled coil) steel price in April 2018 was at ₹44,700 per tonne, a 2 per cent increase over the previous month. This is on account of healthy demand for steel in the country. The consumption in first half of the year was 47.68 million tonnes, an increase of good 8 per cent y-o-y against a world average of 3-4 per cent.
*Domestic steel prices are sourced from CRISIL Research