The recurring debate on the cost competitiveness of the Indian steel industry has taken an altogether new dimension in the context of sweeping reforms in the minerals sector, as the duty structure on steel-making inputs as well as tax on finished products have incited new discussions on ease of doing business in these times of economic slowdown triggered by COVID-19.

The iron ore mines auctions in Odisha earlier this year form the immediate backdrop to the hike in iron ore prices lately due to supply tightness in the market. Only five of the 19 auctioned mines have started operations and that too on a low key.

The duty on coking coal (which can be classified as an irreplaceable import) as well as metallurgical coke imposes further burden on producers, it is argued. While it is true that coking coal prices are at a historic low supporting the cost structure of steel-makers, that of iron ore stays elevated.

The difference between the conversion cost and cost of steel production, inverted duty structure resulting in “royalty on royalty”, the cost burden on the minerals sector and cess on domestic coal are issues that the industry is grappling with.

It is also pertinent to note that cost pressures weigh in when greenfield expansion projects are taken up. The national ambition of enhancing capacity to 300 million tonnes (MnT) per annum by 2030 would require significant expansions. However, the times are hardly conducive to achieving that target what with market analysts predicting over 20% drop in demand in FY21.

The long-term implication of a stiff cost structure is delay in fresh investments and capex plans, as V.R. Sharma, Managing Director, Jindal Steel & Power (JSPL), highlighted at a webinar recently. “India will have to import about 70 MnT of steel by 2027 if capex plans get delayed due to an inhibitive duty structure,” he pointed out.

Cost Disadvantage

The Indian steel industry contributes 8% to the overall GST. There is an 18% tax rate on the iron and steel industry, which is considered by many to be a tad stiff given the government’s drive to upgrade infrastructure and boost construction.

In the pre-GST era, the tax rate on iron and steel was even higher at 19.5%. It included excise rate at 12.5%, value-added tax (VAT) at 5% and Central Sales Tax (CST) at 2%. After the implementation of GST from July 2017, the tax rate on the industry has been fixed and tax on its different inputs such as logistics has likewise been fixed at 5%.

It is important to also factor in certain other duties imposed on critical raw materials; for example, the 5% import duty on metallurgical coke and the 2.5% duty on coking coal.

Dwelling on the steel industry’s cost competitiveness, Sharma informed participants at a discussion recently: “The steel industry contributes 8% to the country’s GST collection, not to mention the 25% tax revenue brought in by steel products. Bulk tax collections happen through the steel, power and oil sectors – major drivers of the economy.”

“The 20-65 paise/kWh electricity duty that captive power producers have to bear is certainly a burden, considering the fact that these producers have to make huge investments in setting up plants and procuring coal,” he maintained.

Pitching for “one nation, one electricity tariff” and the need to rationalise the tax structure to boost the competitiveness of the Indian steel industry, he also said that the INR 400 cess on domestic coal and stiff royalty rates on iron ore and coal are rendering the Indian industry non-competitive globally.

“Electricity duty in Chennai is INR 12/kWh. It is INR 8-10/ kWh in Maharashtra and INR 10/ kWh in UP. This is a major disincentive for EAF producers. INR 3.50/ kWh ought to be the national electricity tariff so that INR 1.50/ kWh is the charge for production of power,” he observed.

He said that these taxes and VAT contribute to making the final product exorbitant for last-mile steel users despite the fact that India has one of the lowest costs of steel production. “Indian Railways has to reduce freight rates with a view to the fact that there is no proper network of inland waterways in India. For last-mile customers steel becomes very costly due to hefty freight rates,” he stressed.

Duty Drawback

While the corporate tax rate is 25%, the government has fixed competitive rates for new companies from October 1, 2019 by reducing the rate from 22% to 15%. But if the demand for reduction of GST on steel products (18%) is valid then even more forceful are demands for reducing royalty on the mining sector.

That royalty, on an ad valorem basis, is the percentage of price notified by the government. The contribution to the District Mineral Fund (DMF) is one-third of the royalty rate while that to the National Mineral Exploration Trust (NMET) is 2% of royalty. In addition, we need to factor in the dead rent on closed or underexploited mines and the raft of indirect taxes such as stamp duty, forest tax, compensatory deforestation tax as well as the cost burden of afforestation, not to forget, of course, the INR 400 cess on domestic coal.

Strikingly, the sector’s contribution to GDP is 2.7% and it employs over 2.5 crore people. The cost disadvantage is obvious, as a mining expert tells Steel360: “Overall, tax on new mines is 60% while that on old mines is 64% because of the higher DMF. One needs to also take into account the corporate tax and corporate social responsibility (CSR) expenditure that miners have to bear.”

Indeed, there is a strong pitch for bringing the mining sector within the ambit of GST and this could also include petroleum and natural gas to lower logistics costs. According to market analysts, there is a significant difference between the conversion cost in the steel industry and the ultimate cost of production and, therefore, the duty on iron ore is a dampener. It is 15% in India compared to 5-7% in other iron ore-rich countries.

Inverted Tax Structure

In fact, the inverted duty structure on iron ore has rightly come in for criticism and instead of fixing royalty and premiums based on the average sales price notified by the Indian Bureau of Mines (IBM) taking into account prices declared by commercial miners, a new National Mineral Index has been proposed.

In a letter to Rajiv Kumar, NITI Aayog Vice-Chairman, Sunil Duggal, President, Confederation of Indian Industry (CII) National Committee on Mining, recently said: “In these times of economic stress, where the government is under pressure to spur growth, the mineral and resources sector could be a potential driver of high growth capable of contributing 8% of GDP by 2025.”

The development of the proposed uniform National Mineral Index (NMI) for all minerals in line with the National Coal Index (NCI) will tackle the ambiguities in the current average sales price regime, the letter states, adding that “NMI can consider production from all sources of production – captive, non-captive mines, etc and will give the correct valuation of minerals, also effectively addressing concerns of royalty on royalty.”

This additional cost hikes the total burden by over 4%. Objections have also been raised about charging high-grade royalty on low grades like charging DR CLO royalty on iron ore fines due to despatch-related issues. It is also pertinent to note that any kind of refund due to higher duty accruing from an inverted structure is not available on account of inputs.

Coal Concerns

If cost of steel production in India – excluding perhaps Commonwealth of Independent States (CIS) steel heavyweight Russia – is the lowest in the world, coal production too is cheap what with about 95% of government miner Coal India Limited’s (CIL’s) total production coming from opencast mines. However, railway freight and tax structure render Indian coal non-competitive compared to low-cost producers such as Indonesia.

“Raw coal is taxed at 8% and the taxes on inputs, for example, explosives, are higher and the reverse charge mechanism of calculating royalty – i.e. on the basis of electricity prices – is a matter of concern for producers, not to mention state cess and levies, forest tax and pandemic tax, all of which are antithetical to GST,” said a senior CIL official.

Even a cursory glance at the overall tax structure and the raw materials scenario, therefore, shows that boosting cost competitiveness of Indian steel is an uphill task. This perception reinforces itself if we take other countries into account. “China provides 13% rebate on exports which is a huge fillip for Chinese producers. The government should take a pragmatic view to reducing taxes and levies as capex plans in the domestic steel industry will get delayed due to prevalence of such high duties,” said Sharma at the webinar.

“I estimate that by 2027 India would have to depend on 70 MnT of steel imports if domestic investments don’t pick up pace, which is unlikely to happen if the financial structure is not rationalised,” he said.

Long-term Perspective

In the long term, iron ore demand is going to come down as the space for recyclable materials is fast gaining ground, lessening reliance on virgin ore.

“Coal demand is likely to evaporate by 2050 as a gas-based economy takes over, including increasing dependence on natural gas as well as technologies such as coal gasification, coal bed methane, syngas to SNG and other ways of minimising dependence on coal gain ground,” Sharma averred.

“After 2050 there would be no takers for coal as renewables are fast acquiring a major share in the energy basket. It is better to utilise existing reserves as technological advancements would render coal use defunct after 2050. So, it’s wise to use the existing resources to boost the power and other coal-consuming sectors,” he said.

To boost capex in the steel industry, “the government needs to rethink its stiff tax structure, particularly the myriad duties on raw materials”, he said, adding that iron ore beneficiation, that is pelletisation, should get a leg-up with a view to utilisation of low-grade fines, instead of focusing entirely on exports. That will be the ultimate value-addition for low-grade Indian fines which we have in plenty, he opined.

Surely, the ongoing reforms in mining and the government’s ambition of boosting steel capacity should ease concerns related to the industry’s cost disadvantage and incentivise investments.