The Indian steel industry will benefit from the government’s decision to not sign the Regional Comprehensive Economic Partnership (RCEP), according to a report by India Ratings (Ind-Ra).
Earlier in November, 10 ASEAN members along with China, Japan, South Korea, New Zealand and Australia signed the pact that will see the members progressively bring down tariffs across the trading block.
Over the past decade, Indian domestic steel companies have been under severe margin pressure due to a swarm of cheap imports from RCEP members such as China, South Korea, Japan and Vietnam, and any multilateral free-trade agreements - particularly comprising China - could have posed more credit risks to domestic steel producers, Ind-Ra said in the report.
India is the second largest steel market after China. Imports from RCEP countries increased to about 57 percent of total imports into the country during the fiscal year 2019-20, from about 43 percent during the fiscal year 2016-17, and India’s entry into RCEP would have aggravated the pressures on domestic steel companies’ sales and margins. Keeping away from RCEP will help the credit dynamics of the domestic steel sector to remain robust and resilient, Ind-Ra said.
According to Ind-Ra, since Indian domestic steel producers have a low reliance on exports, opting out of the RCEP should not materially impact the country’s long-term investments and export plans under the New National Steel Policy.
China’s steel capacity and its domestic consumption are about tenfold those of India and about half of the world’s total.
Noting that India’s cost disadvantages more than offset its competitiveness, the report said that, compared to China, India’s overall cost of steel deliveries is estimated to be higher by $40/mt due to the cost disadvantages such as poor logistics and infrastructure, the higher royalty and tax burden on mining, expensive power and the cost of capital.
India also has a high reliance on imported coking coal, which poses raw material availability and price risks, further constraining its competitiveness, the Ind-Ra report said.