Teji Mandi Explains: Steelmakers’ loss is automakers’ gain!

What’s Happening?

The Indian government last week imposed a 15% export duty on a range of finished steel products to improve the domestic steel availability and keep a check on steel prices. Export duty of 15% has also been levied on pig iron.

The government also waived customs duty on the import of some raw materials such as coking coal and ferronickel.

Which Industries are Affected?

The two most severely affected industries are the steel industry and the automobile industry.

The 15% export tax will reduce the margins on steel exports. The government’s move could lead to a 7% fall in the domestic steel prices, with a 15% fall in export realisation from the new duty! The duty hike will also negatively affect capacity expansion projects under the PLI scheme.

But steelmakers’ loss is automakers’ gain! Automobile companies will benefit from softening steel prices and a duty cut on fuel as the cost pressure is expected to ease. Every 10% drop in steel prices can expand automakers’ margins by 60-200 basis points.

Outlook for Investors

According to Axis Securities, steelmakers will protect their domestic sales margin by reducing their capacity utilisation, rather than diversifying sales in the domestic market.

The Indian steel industry has significant investment commitments in the range of 36-40% of the total investments committed by the entire manufacturing sector. All these might be relooked upon!

While on the positive side, investors can keep automobile stocks on the radar as they are poised to benefit from softening input costs and fuel prices amid soaring inflation!