US tariff hike on steel: What's in store for India

On Thursday, March 1, President Donald Trump announced general tariffs on US imports of steel and aluminium to the US and once again shocked the world. The proposed tariff on steel imports will be 25%, and aluminium imports 10% applicable to all countries.

The immediate impact, world stock markets have tumbled reflecting a bigger concern: a possible "trade war". A trade war happens when other countries affected by the tariffs impose tariffs of their own in retaliation, potentially setting off a battle of escalating tariffs and hobbling economic growth. Other countries and blocs such as the European Union and China have already threatened tariffs in response. That would hurt the makers of a wide variety of US exports, including beef, corn, pork, cars and motorcycles. Trump, in turn, said that he would then hit European cars with tariffs.

Sources quoting Bloomberg News are stating that the EU aims to apply a tit-for-tat levy on a range of consumer, agricultural and steel goods imported from the US. Targeting €2.8 billion ($3.5 billion) of US goods ranging from jeans, whiskey, motorcycles and ladders sends a political message to Washington about the potential domestic economic costs of making good on the President's threat.

On Friday, March 9, Trump followed through his threats, by announcing his decision to impose aforementioned tariffs on all countries, except Mexico and Canada, with whom the US administration is working out a refurbished North American Free Trade Agreement (NAFTA). Mexico and Canada are excluded from these tariffs, due to the continuation of trade talks and the expectation that these two will prevent transshipment through their territory to the US. The cumulative contribution of both these countries is a quarter of steel imports into the US.

The largest steel exporter to the US was Canada, with 16% of the market share, while 9% of all finished steel products that were consumed in the US were shipped by Mexico. The Presidential proclamation goes on to invite any country that believes it deserves an exemption to make a case for one. The government wants to limit imports even with Mexico and Canada. Though no formal talks have been held, the European Union and UK are already calling for an exemption. Countries or regional blocs are asking for an exemption for themselves, rather than collectively take action to compel the US to remove these tariffs. A deal with Australia was indicated by Trump through a tweet on Friday.

Curbing the US imports of foreign steel and aluminium by Trump, has led to disagreement within his Republican Party, and is based on a national security argument that the EU dismisses. The White House threat risks provoking retaliation across the globe and a slew of complaints to the World Trade Organisation (WTO), which has never ruled on a dispute involving trade restrictions justified on national security grounds. Various reasons for the growing concerns have been enumerated by the critics of the US action, including the chance of tit-for-tat retaliation from impacted trade partners, domestic economic distortions in the US as a narrow industry is protected at the expense of downstream producers, a further weakening of the WTO, and ultimately, higher prices for consumers. India ranks ninth on the list of trading partners that run a trade surplus with the US - exports of India to the US is more, as compared to it imports. According to US government data, China, Mexico and Japan lead the list, and even Vietnam runs a higher surplus against the US than India does.

US tariffs on steel and aluminium are a threat to Indian steel and aluminium producers, though India is a significant producer and consumer of both steel and aluminium, but its export market is not that heavyweight. For instance, India's share of US steel imports is only 2.4%, and 2% in aluminium, according to the Indian government. That implies the impact would be negligible, but it would be impacted for two reasons

Firstly, the US decision threatens to upset the trade flow in these materials. In 2016, the US met nearly two-thirds of its aluminium, and about a fourth of steel consumption from imports. The government wants to increase the share of locally-produced metal. If the output of aluminium and steel were increased in the US, there would be more metal in the world than anticipated.

The exports to the US would decrease, as the countries are likely to look at other markets for exporting their surplus even at lower prices. To nullify the tariff impact to an extent, the threat could come from exporters cutting prices. Again, the final tariff rates should throw light on this aspect. The risk of prices coming under pressure will increase once the tariffs come into play.

Secondly, in the global export market, India may be a relatively small participant but its exports have risen sharply in absolute terms. Domestic output has been increasing on the back of capacity additions, but India's consumption has not kept pace. In April-January 2018, according to a Care Ratings report, for instance, exports of steel rose by 40.2%, and aluminium production rose from 1.4 million tonnes to 2.8 million tonnes between FY14 and FY17, but consumption rose from 1.6 million tonnes to only 1.9 million tonnes. It led to a sharp jump of 57% in exports in FY17. While the government can protect domestic producers from cheaper imports, they are on their own in the export market.

New Delhi may need to re-look at the anti-dumping charges, to ensure that the current cycle of recovery at the country's largest makers of the alloy is unaffected. India was the net importer of steel two years ago, and now it is a net exporter, with net outbound shipments of around 3 MT, after the government introduced protective measures. Of the total exports from India, US accounts for only 2%, but experts are concerned that supplies earlier bound for the US, may be dumped in expanding markets such as India, especially from suppliers such as South Korea, Russia and Japan. This may also impact the improving demand-supply scenario. In the first nine months of FY18, the domestic steel industry has grown at 4.5%, as compared to a mere 3% in FY17.

Indian companies in the aluminium and steel sectors, with exposure to global markets, are expected to be affected to a larger extent. Among companies, Hindalco Industries and Tata Steel have significant operations overseas.

Tata Steel's European operations will be under pressure and JSW Steel, which derives about a fifth of its sales from exports, may also be affected. Other steel companies such as SAIL, Tata Steel India and Jindal Steel and Power may not be affected, as the majority of their sales are in the Indian market. Tata Steel's European steel operations are likely to feel the heat. Even with the joint venture of Thyssenkrupp and European Business, the main region of operation will remain Europe. Any significant downturn in steel demand or prices is a risk to be watched for.

Hindalco's subsidiary Novelis buys aluminum metal or scrap, which is used to make products such as beverage cans or products used in the automobile industry. The impact on Novelis is likely to be less than expected, since Canada's steel and aluminium industry is exempted. The March quarter results of the company, will provide information to the investors on what impact the tariffs are having on its business.

In summary, Trump's tariffs are here to stay and how other countries react to these tariffs will be a factor that will determine how prices behave. Post the March quarter results, company-specific impact should become clear. If other countries retaliate with their own tariffs, it will have a bigger risk, and commodity markets worldwide would be greatly affected.

(The writers is Director for Wealth
Discovery at EZ Wealth)