The growing trend in Indian steel production is unlikely to continue if minimum import prices (MIP) are not extended beyond August, according to India Rating & Research (Ind-Ra). This is because the trend, since MIP was imposed in February, has been the result of substitution for imports rather than higher consumption.

The replacement of MIP with anti-dumping duties would not have the desired impact, as duties are less encompassing. “While the steel industry is arguing for an extension of MIP, the rollover would remain a formidable decision for the government, since the economy has not moved to the Pareto-optimal equilibrium when MIP was imposed,” Ind-Ra says in a note sent to Kallanish.

Post MIP imposition, Indian steel output grew only 0.3% on-year in February-March. Exemptions given to letter of credits for imports opened prior to MIP resulted in a 4.4% import growth in the two months. In the June quarter, however, steel output grew 3.8% on-year, while consumption grew only 0.3%. Imports fell -31%.

Interestingly, Indian steel consumption fell -4.3% on-year in June, in contrast to the positive on-year monthly growth seen since April 2015. This “… could be attributed to the delay in purchases by users, based on the expectation that prices will moderate post the expiry of MIP,” Ind-Ra says. “In that scenario the consumption levels could pick up once clarity emerges on the future of the MIP policy.”

“Ind-Ra opines that profitability for most steel producers is likely to remain under pressure, due to the newly added capacity,” the agency continues. “The interest cost and depreciation from these new capacities have now started to impact the income statement and have increased both operating and financial leverage in the business. Therefore, marginal improvements in capacity utilisations are unlikely to improve the profitability.”