As Steel Prices Drop, India Slashes CVA Tax Rate by 4 percent; Outlook Slightly Positive for 2009

As part of a stimulus package of $4.08 billion to boost demand for commodities in the market, India’s government recently announced a reduction in central value added tax (CENVAT) by an ad-valorem rate of 4 percent across the board with immediate effect until the end of the current fiscal year. Steel prices are expected to drop by $20.36 per ton to $32.58 per ton in response to the duty cut. However, the move will cause the government to incur a revenue loss of about $1.77 billion during the remaining four months of the current fiscal year.

Prices of steel products had reached an all-time high of $980 per ton to $1,020 per ton in the month of April when demand was at its peak, according to research from Industrial Info Resources (Sugar Land, TX). The onset of the worldwide economic crisis saw prices plummeting by about 40 percent since July. The prices of steel products currently range from $570 per ton to $815 per ton in the domestic market based on value addition and quality.

Hot-rolled coil, which had reached a peak price of $1,120 per ton earlier this year, is currently priced in the range of $650 per ton to $690 per ton. The products are expected to cost $20.36 per to $30.55 per ton less to the end consumer because of the CENVAT reduction.

A drop in the price of construction-grade steel, including TMT and structural steel, which are currently priced at $570 per ton to $610 per ton, would benefit the real estate sector. The government also announced a slash in excise duty from 14 percent to 10 percent for construction-grade steel products that are not modvatable because manufacturers do not benefit from excise refunds for value addition.

Buoyed by the duty cut that would stimulate demand and enable companies that had been operating at 70 percent to 75 percent of their capacity to resume full-scale production, India’s steel industry announced that it would pass on the benefits of the reduction in CENVAT to the end consumer. JSW Steel Limited (Mumbai) announced that it would reduce prices by about $30.55 per ton across its entire range of products from hot-rolled to galvanized steel. Ispat Industries Limited (Kolkata, West Bengal) announced an immediate reduction in prices by about $32.58 per ton. Essar Steel Limited (Mumbai) is yet to decide on the products for which it would reduce prices as well as the extent of the reduction. Manufacturers of construction-grade steel, including Steel Authority of India Limited (New Delhi), Rashtriya Ispat Nigam Limited (Visakhapatnam, Andhra Pradesh) and Tata Steel Limited (Mumbai) will benefit from the reductions in CENVAT and excise duty.

The steel industry will also benefit from the CENVAT rate reduction for automobiles that would reduce car prices and boost demand for steel. However, it is skeptical about the slash in the export duty from 8 percent to 0 percent on iron ore fines and from 15 percent to 5 percent on iron ore lumps aimed at boosting exports that, in turn, could affect domestic steel producers who procure iron ore from private miners.

Despite the downward spiral trend in steel prices, Essar Steel recently declared that it would not reduce production and would achieve a target output of 3.6 million tons for the current fiscal year. The firm is optimistic about growth in demand for steel in the Asian market even as it maintains that global demand for steel would remain stagnant in the second half of the present fiscal. ArcelorMittal (Luxembourg, Luxembourg), which trimmed production by 35 percent and announced plans for major layoffs in the U.S. and Europe, is looking at increasing production in the first half of 2009 in anticipation of growth in steel demand.