May be at the end of this article, I would be able to connect anti dumping to bank recap, atleast a symbiotic relationship should be established.
Pre-2016 all steel companies use to complain about the stress in the sector due to cheap Chinese imports. China has huge overcapacity and use to dump steel in India and around the world just to keep their factories running and GDP growing.
India along with other countries started complaining about unfair trade practice out of China. Countries realized that it is in the interest of indigenous steel companies to put a restriction on dumping of steel from China.
In India, Government responded to the request of the steel companies in 2016 and imposed provisional safeguard import duties on steel imported from China. Later on, ministry further improved the breath of protection and bring in anti dumping duty on China and other countries.
As a result of which India which has net import of 7.7 million tonnes of steel in FY2016 is now turned net exporter of steel and has clocked export of 0.844 million tonnes in 2017. This was further improved in FY2018, where India has net export of 1.8mt of steel till January.
There is significant improvement in the health of steel sector with government intervention. All companies are reporting very strong EBITDA margin. Is it happening due to cost improvement? No, raw materials cost is high in India as well as overseas. Is it due to improvement of utilisation and fixed cost leverage? Mildly, steel consumption has improved only 3.0% in 2017, though production has improved by 8.5%, that's because of import substitution and this benefit is one time gain. From here, operation leverage will be equivalent to consumption growth.
Now let's look at the banking side of the story. Steel companies is the largest contributor to the banks stress. Aggregate debt of top five stressed steel companies in India is close to 1.4 lakh crore.
Of the twelve stress accounts which are taken for resolution, major contribution is from steel sector (Bhushan Steel, Essar Steel, Bhushan Steel and Power, Electrosteel and Monnet Ispat) with amount of 1.4 lakh crore. Bid submitted for Bhushan steel is even higher than expected by the banks and now they are going for potential write back on the provisioning done earlier.
Isn't it equivalent to bank recapitalisation. Few months ago, everyone was guessing for the quantum of hair cut banks have to take when these companies going for resolution and now we are saying taking about sector turnaround and write backs.
So far so good, banks have to be funded and industry has to be protected. But recent price hike by steel companies and raw material have gone far beyond. This might even kill the growth of the sector which it is trying to protect.
Current state of affairs is India is net exporter of steel. Price realised on exports is lesser than what they get from Indian consumer. Here is the link regarding milking of domestic consumer, what started as protectionism is moving towards profiteering. Article mention India has started exporting steel to China, this can happen only when exporting price is less than what they are selling to Indian consumer.
May be some correction to steel prices will come once the process of resolution of steel companies is over, till then I would think anti dumping duty is a form of mini bank recapitalisation.
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