US president Donald Trump is in news again, this time for his announcement of imposing import duty on metals, primarily of 25% on steel & 10% on aluminum has sent metal stocks plummeting. In this article, we analyse the impact of import duty on major steel companies in India and what lies ahead with such policies in force.
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What & why is import duty imposed?
Import duty or anti dumping duty was virtually unheard until a decade back. It was cheap selling of commodities from China which crushed local manufactures across the world. It forced policy makers to develop policy which can safeguard local businesses and curb cheap imports from foreign countries or for a particular commodity. It has been widely used worldwide against Chinese exporters as they tend to sell products and commodities that are produced at incredibly cheaper prices. They are able to do so due to combination of various factors inside China like cheap labor, easy availability of loans from Chinese banks which are backed by Chinese government and suppressed valuations of Yuan.
Major Exporters to US
Let’s have a look at the major steel exporting countries into US.
India contributes to only 2% of total steel imports for US. Top exporters to United states are Canada, Mexico, Brazil & South Korea. European Union and China has announced to introduce similar measures against US exports in their countries, if Donald Trump administration chooses protectionism path. However a deeper look into import data suggest that they do not have much to loose from at least this move. May be they want to retaliate and nip in the bud America’s protectionism policies before it hits their other major exports. Surprisingly Canada, Brazil and South Korea are quite while this move will hurt them the most.
India’s Steel Industry
Let’s have a look at how India’s steel export fares across the countries and across companies.
For India, major steel export goes to Vietnam followed by Italy & Nepal. Exports to US is only 5% of India’s total steel exports. Even if US bans all of this, it will not dent much because steel consumption is on the rise globally and it should be covered up by other geographies. The major producers of steel in India among top six producers are Tata Steel which produces almost a third of total volumes, followed by JSW steel & SAIL. Stocks of all these companies have dropped since this news broke out.
Beneficiary of Steel Ban
It will be american steel producers which is dominated by Arcelor Mittal America, US Steels, Nucor Corp, AK Steel, etc. Arcelor Mittal imports steel bars from mines in Brazil for its plant in US. It is unclear if this will also be subjected to import duty. If it does, it will be a huge setback for Arcelor Mittal.
China is the largest producer of steel in the world. It produces almost equal amount of steel what rest of the world combined produces. American companies have been blaming China for cheaper steel import from long time and have imposed 24 different types of countermeasures to curb cheap Chinese steel from entering America. This has been successful to an extent as China contributes to less than 1% of steel imports in America. Despite such negligible market share, extending such blanket import duty on all nations seems too much in our opinion. This could lead to retaliatory duty from America’s friendly countries like Canada & South Korea which may not be good for American economy as a whole.
Once import bans are in place (they are still at proposal stage), it will lead to oversupply of steel to rest of the world and major exporters will seek new market to dump their steel which will create demand-supply imbalance. Steel prices will tumble and it can hurt operating margins for steel producers across the world.
What else India exports to America?
With Trump in charge, there are possibilities of new import duties in future. It will be worthwhile to be aware of what India exports to America the most.
India exports Goods to america in tunes of $50 billions which makes up almost 2/3 of total exports while Services contributes for remaining third. Services include information technology, telecommunications, travel & research. For Goods, largest contributor is precious metals & stones, followed by pharma, oils , mineral fuels & textile. Precious metal & stone exporters import raw stones, process them using cheap labor in India and send polished & finished products to overseas market. Pharma, IT & textile are well known industries catering to american markets due to skilled labor & availability of raw materials in India. If you observe, US has been critical of India’s IT companies (Visa restriction), Pharma companies (Surge in US-FDA inspections) off late to limit top sectors. So in a way, these two sectors are already impacted due to other factors and not necessarily from import duties. In future, there may be new changes which can impact industries which are over-dependent on american markets.
Is there a possibility of a global trade war? Well, it is already happening since many years, ever since cheap chinese goods has spooked all major economies. Now this war may get more intensified with Trump (businessman turned politician) jumping into the mix.
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