Clean Environment Cess doubled

Clean Environment Cess rate being increased to Rs 400 per tonne from Rs 200 per tonne- The doubling of Clean Energy Cess from Rs 200 to 400 per tonne would further increase the input cost for domestic producers.

Higher infra outlay to generate demand for Steel

The total outlay for infrastructure in budget estimates 2016-17 stands at Rs 2,21,246 crore which is likely to generate much needed demand for steel industry which is reeling under competition from imports and poor domestic demand.

Export duty on Iron ore fines reduced

Export duty on Iron ore fines with Fe content below 58% decreased from 10% to NIL while Export duty on Iron ore lumps with Fe content below 58% decreased from 30% to NIL. To benefit iron ore miners such as Vedanta.

Stock to watch

JSW Steel, Jindal Steel, Tata Steel, SAIL

Outlook

Union Budget 2016-17 is a mixed bag for steel sector as the doubling of Clean Energy Cess from Rs 200 to 400 per tonne would further increase the input cost for domestic producers and hurt margins. While increase in infrastructure demand would generate much needed demand for steel industry which is reeling under competition from imports and poor domestic demand. Additionally, the government's focus on rural-urban (rurban) is also likely to create steel demand. The FM's budget proposal on infrastructure meets a long standing demand from core sector industries like cement and steel.

Pre Budget Expectations- Not Fullfilled

• Expect customs duty on the long and flat products may be increased to 25% from 10% and 12.5% respectively

During April-August 2015, India imported 4.5 million tonne steel as compared to 2.9 million tons during April-August 2014 registering a whopping 51% growth. Exports, on the other hand, fell by 28%, and were 1.76 million tons against 2.4 million tons in April-August 2015.

• Expect customs duty on Manganese ore, Chrome ore, Molybdenum ore, Vanadium oxides, Hydroxides and other salts of Oxo metallic Acids (Vanadium Oxides Concentrates and Ammonium Meta Vanadate) may be reduced to nil from the existing 2.5%.

• Duty on coking coal be exempted as was the case prior to the Budget 2014-15.Import duty of coking coal has been increased to 2.5% in the Union Budget 2014-15.

Coking coal is used largely by the steel industry. Negligible quantity of coking coal is available domestically, and thus the need is met mainly from imports.

• Custom duty on metallurgical coke may be reduced from 5% to NIL

Coking coal, Steam coal and Met coke are key inputs in steel making and account for substantial portion of cost of production for Steel. Historically coal used for metallurgical purposes has enjoyed exemption as steel is critical in fuelling India's growth. Subsequently, due to scarce availability of coking coal technology has been developed to use other coal (non-coking coal including what could be termed as steam coal) for metallurgical purposes through technologies such as COREX. During the period 2012-2013 such coal was exempt but this exemption was subsequently withdrawn.

• Basic Custom duty on LAM Coke be increased from 5% to 10% ad-valorem.

LAM Coke is a value added product and made from Coking Coal at various captive and merchant Coke Oven Plants for onward usage for metallurgical purposes mostly in Blast Furnaces for Steel making. Devaluation of its currency by China has made its imports very cheap and Indian Coke Oven Plants are incurring losses.

• Customs duty on LNG is made NIL

India has a gas based steel manufacturing capacity of 10 MTPA accounting for almost 9% of the total steel manufacturing capacity in the country. These units also represent more than 45% of sponge iron production in the country and are critically dependent on natural gas as feedstock. Although these units have an allocation of more than 7 MMSCMD domestic gas from APM and RIL KG D6 but are currently receiving less than 0.60 MMSCMD gas.

• Expect import duty on iron ore may be brought down to zero from the currently levied 2.5%.

India is currently faced with a shortage in the production of iron ore, the primary raw material for steel making. The iron ore production in the country has fallen from 218 million tons in 2009-10 to 144 million tons in 2013-14 and 125 million tons in 2014-15.

• Expect customs Duty on steel grade limestone and dolomite be reduced from 2.5% to nil

For Indian steel industry, the cement grade limestone reserves are adequate but the reserves of SMS, BF and Chemical grade limestone are not adequate and are also available in selective areas. Increase in steel production in the country, has led to rising demand for SMS and BF grade limestone. Therefore the limestone imports have been increasing consistently.

• Expect customs Duty on all key raw materials like Ferro Nickel, Pure Nickel, Ferro Niobium, Ferro Vanadium, Ferro Titanium and Ferro Moly (used in the production of stainless steel) be reduced to zero

The key ingredients for production of stainless steel include Ferro chrome, Ferro Nickel, Pure Nickel, Ferro Moly etc. These are not available in India and need to be necessarily imported for production of stainless steel.

• Expect import duty on electrodes and refractory material may be reduced to nil from 7.5% and 5% respectively

As there is no sufficient domestic capacity for manufacture of these items and need to be imported, the cost of domestic producers is increased

• Expect custom duty on Stainless steel scrap be restored to the original rate of nil from 2.5%

The Domestic Stainless Steel Industry uses Electric Arc Furnace (EAF) route for manufacture of stainless steel and is, therefore, constrained to use Stainless Steel (SS) Scrap instead of Iron Ore. The bulk of the Scrap requirements of the Domestic stainless Steel producers are met through imports which is procured mainly from countries like Europe, Korea, South East Asia, Central Asia etc.

• Expect excise duty on fabricated steel structure undertaken by PEB/Pre-fabricators at their own premises be reduced from the current 12% to 8%.

The site based pre-fabrication of structurals are permitted to be used in the building / structure without payment of Excise Duty as these are not taken out of the site, the pre-fabrication activities conducted on structurals at outside premises of the pre-fabricated manufacturers are excisable @ 12.5%. This has led to mass fabrication of structurals at the site which do not follow the quality norms as required in structural fabrication and generally done by fabricators having little knowledge of good quality fabrication. On the other hand, the steel structurals fabricated at the premises of fabricators follow state-of-the-art technology and standard operating practices of good fabrication, are priced much higher (after loading Excise Duty of 12.5%) and hence lack orders

• Expect capital expenditure in steel business to be allowed weighted deduction of 150% of the expenditure

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