Impact of the U.S. tariffs on Indian steel

• Imposition of the U.S. tariffs on steel and aluminium
• Consequences for steel surplus nations
• Effects of the development in the Indian industry

The U.S. government has finally signed a proclamation on imposing tariffs of 25 and 10 percent on the import of steel and aluminium. The move comes after the announcement was made by the U.S. administration to impose tariffs on these two metals under the Section 232 of the Trade Expansion Act, 1962. This allows the U.S. to charge a levy on import of goods, which can impact the national security. However, Canada and Mexico will be exempted from these duties as both these nations are negotiating with the U.S. on the NAFTA (North American Free Trade Agreement). The U.S. President also hinted towards granting similar favours to other countries on the grounds that it will not affect the national security.

The United States is the 4^th largest steel producer in the world. In 2017, there was a demand of around 107 million MT of steel, while the steel production was nearly 82 million MT. It was due to this reason that the U.S. became the net importer of steel. Furthermore, in the past 7 years, the U.S. on an average imported 32 million MT of steel (roughly 7% of world’s total exports) with Canada, Brazil, South Korea, Mexico and Russia being the top 5 exporting nations. 

The impact of these new tariffs will be strongly felt in Brazil, South Korea, Russia, Turkey, Japan and the EU (specifically Germany).  However, India which is the 3^rd largest producer globally may not experience a direct bearing of this decision as it exports a mere 0.7 million MT of steel to the U.S. This constitute only 2.2% of the total imports of America. But, the Indian steel manufacturers may feel the brunt of the decision as other nations may dump their products in the domestic market.

Moreover, out of the top 10 exporters to the U.S. with an exception to India and Mexico, most of the countries have a higher export share as a percentage of production. This signifies that these are more mature markets or steel surplus nations. These nations may start looking for new markets for their products.   

Canada, Brazil, Mexico and Turkey were more depended on the U.S. for export of steel products as their steel exports to the U.S. compared to total steel exports were around 88%, 30%, 67% and 14% respectively (2017). While Canada and Mexico are exempted from the tariffs till the NAFTA deal is re-negotiated, but Brazil and Turkey will be the nations to mainly get affected by the new rules. 

The decision will flush the market with around 22 million MT of extra steel (excluding Canada and Mexico’s share), which was earlier exported to the U.S. The nations with a surplus will export this to the net importing countries like India, where the demand and supply are very tight.

India’s import of finished steel, which was around 11.7 million MT (2015-16) declined to 7.3 million MT (2016-17) as the Ministry of Steel imposed the Minimum Import Price (MIP) on 173 steel items (February 2016) when the prices of steel declined to ~$325 per MT. The MIP helped the domestic players to remain competitive in the market and resulted in a decline of imports by 40%. The MIP also boosted total Indian steel exports, which doubled from 4 million MT (2015-16) to 8.2 million MT (2016-17).

However, the Indian steel industry which has just got out of a bad phase may once again enter the distress zone. The MIP was withdrawn with effect from 4 February 2017 as the protectionist measure cannot indefinitely remain in force and the industry should face the global competition. The improvement in steel prices last year also enhanced the profitability of Indian steel manufacturers.

There is a possibility that the steel surplus countries such as Brazil, South Korea, Russia, Germany, Japan and Turkey may soon start dumping their products in the Indian market and turn the nation into a dumping ground after the U.S. decision on imposition of tariffs.

This raises a pertinent question; will the Indian government take cognizance in the form of a reintroduction of the MIP or impose anti-dumping duty on steel products? Further, considering the current prices of steel, which are ~$750 MT and the cost of production is ~$450 per MT, the steel manufacturers are still making healthy margins. Thus, government’s intervention is unlikely in the near term. This might have a negative impact on the profitability of Indian steel players, especially in case of a surge in steel imports.