Talking Point. Engage in battle, win the war

While the planned increase in US tariffs on steel and aluminium, under section 232 of US Trade Expansion Act of 1962, may support US domestic producers, in line with the US presidential promise, it might trigger several new trade battles globally.

As the planned tariff hikes are not country-specific but global in nature, the actions may initiate equally strong responses from the affected regions/countries.

The steel industry, given its multiplier effect, has traditionally been considered core to domestic economies the world over and, hence, receives supportive attention of national governments. While that continues to be the case in most developing economies, its relative status in developed markets has given way to several other industries which have been drivers of economic growth, employment and leadership. Hence, the reasoning of the US that steel imports are a threat to its national security is a subject of debate.

Domestically for the US, there will be the flow-on impact of increasing costs for downstream industries as it imports around 26 per cent of its total annual steel requirements. Any restrictive order could create a short-term disruption to supply, which will push up domestic steel prices.

Further, any tariff increase on metals from Canada and Mexico will have follow-through implications due to significant cross-border metal trade between these three countries.

What it means for India

We can expect China and the EU to kick-start investigations on their imports from the US and initiate measures to protect their own domestic players. As steel trade is global in nature, as exports from the EU may get affected, it will lead to imports from other countries, including India.

Aluminium exports from other countries such as China and Australia will also seek other markets and India will have to be alert and agile in this evolving scenario of shifting supply chains.

The direct impact of the proposed action on India may be limited as India contributed only around 2 per cent of US steel imports in 2016. According to the Joint Plant Committee’s provisional data, steel exports have grown by 40 per cent year-on-year during April-January 2018 to 8.2 million tonnes largely due to increasing global steel prices since June 2017. It is normal to assume that the global exportable surplus earlier entering US would now have to be absorbed by domestic or other export markets, putting pressure on prices in these regions.

This will impact the margins of Indian steel producers who only recently started to enjoy the benefits of buoyant prices due to domestic anti-dumping duties. As India has also slapped tariff on specific imports, domestic steel prices are ring-fenced to a certain extent. To ensure that the current cycle of recovery at the domestic players is unaffected, India may look at re-setting the anti-dumping charges.

The minimum import prices for steel products introduced last year are way below the current market rates, and may prove ineffective in margin protection for local producers.

We are witnessing a trend of rising trade protectionism engulfing most parts of the world. The reflective response to protection is usually more protection — more products, more countries and so on.

If this continues to spiral, focus on costs and efficiency are likely to be the casualties. While exploring means to garner more protection in the short-term battle, it would be prudent for industry to also spend energy and attention to strengthen its competitiveness over the long term.

India has some natural competitive advantage in steel and aluminium, which must be leveraged and enhanced. Focus must move to addressing the issues that impair our ability to be the least-cost producers in the commodity side of business. Long-term sustainability will be achieved by innovation, value addition, improved use of all capital — natural, financial, talent and social to make the business sustainable.

Fortunately, the robust growth in demand is expected to sustain over a long time to come for Indian producers. Shall we focus on the challenge of producing all that we are expected to need in future, including the items of our strategic needs and national security?

The writer is Global Steel Leader, EY

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