Impact of the Minimum Import Price of Steel

A minimum import price (MIP) of steel was imposed between Feb 2016 and March 2017 in India to protect the domestic industry from cheap imports from other countries. The steel industry in 2015 was facing several challenges

1. Slowdown of domestic industry in China (which creates about 50% crude steel of the world) causing a drop in prices resulting in dumping of steel well below cost of production
2. Similar problems in South Korea and Japan
3. Closing down of iron ores due to Supreme Court orders in 2012 and 2013 reducing availability of iron ore, increasing the cost of production in India
4. Financial stress in the domestic industry caused by bad loans

There were also existing free trade agreements between major steel producers Japan and South Korea, which prevented India from adding import duties to imports from these countries. The MIP was implemented across imports from all countries, along with the implementation of additional import duty for some countries, and heavy antidumping duties.

Impact of MIP on the steel sector (intended beneficiary)

Impact: Positive

The primary purpose of imposition of MIP was to protect steel manufacturers from cheap imports. It definitely helped curb the import of cheap steel. There was a 38% reduction in finished steel imports in 2016–17 compared to 2015–16. Import of finished steel in 2016–17 was 8.6% of total domestic consumption, as opposed to 14.3% in 2015–16. The industry also grew well in this year, with a 11.9% increase in steel production. Domestic demand, however, grew only by around 3.1%.

Prices went up by an average of about Rs. 5000 per metric ton for almost all varieties of finished steel. Clearly, the industry has been able to command better margins for their products.

Source: SteelMint Analysis

Impact on domestic steel consumers

Steel is an intermediate good, so if the price increases, it will directly impact the value of the finished good. The impact of price increase on the finished good depends on its share in the cost of production, the price elasticity of demand for the finished product (for domestic markets) and competitiveness(mostly for export). Let’s take a deeper look at some of the industries to understand this better.

Construction industry

Price increases in steel created a ~1.5% increase in the cost of construction. If this increase were not there, the construction industry would have created an additional 1.5% worth of construction (about 210 billion) output at approximately similar cost. On the other hand, the additional revenue to the steel industry based on consumption in the construction industry works out to be about 120 billion. (See Appendix 1 for calculation). The net effect of MIP with respect to this industry is negative.

Automobile parts exports (reduced competitiveness in exports)

About a quarter of Indian auto parts industry is geared towards exports, which is an extremely competitive market with low margins. Auto parts exports fell by around 3.57% when global automobile production grew by 4.54% in 2016. Auto export contracts are typically linked to the global steel price, therefore a higher price in domestic steel price hit them badly.

Automotive industry

According to a report in Business Standard, an increase of 10% in steel prices would increase the cost of production of vehicles by between 0.6% to 1.6% depending on its category. Here, there was an approximate increase of 20% in steel prices. This would have left to an approximately 1.2% (51 billion)(See Appendix 2) reduction in the number of automobiles sold. Since part of this is exports, the damage would have been much more.

Automobile exports account for about a quarter of the industry. While passenger and commercial vehicles showed an increase in export sales, two and three wheelers both dipped in export sales.

Automobile production trends

Export of automobiles

Money Laundering

There were reports in The Hindu about revenue, intelligence and enforcement directorate officials investigating possible money laundering to buy low price steel from the international market. During the imposition of MIP, domestic prices were almost always below the MIP. The only reasons we should have steel imports would have been long term contracts, specific products not available in domestic market and money laundering.

Summary and Learnings

1. Protectionist measures such as minimum import prices help save a domestic industry from the adverse effects of the global market. In times like when the MIP was introduced, it was a particularly difficult time for the Indian steel industry. The intervention helped.
2. There was an increase in the cost of steel and a comparatively higher revenue to the steel industry. When you look at performance of steel dependent industries, the impact was felt in reduction of total value added by the industry, and not the revenue of the industry itself. MIP in effect created inefficiencies in the ability of industries dependent on steel to deliver value.
3. Exports suffer quite a lot more directly because of lowered competitiveness in the industry. All steel related exports I looked for contracted in this time period. I am, however, not sure how to isolate this to impact of MIP alone.
4. A slightly different way of looking at MIP is as a transfer of money from the consumer to the producer. It doesn’t seem fair to force all steel consumers to spend money to protect a steel industry that cannot sustain by itself.
5. If we do need to regulate imports, it might be a better idea to introduce antidumping duties instead. It does not incentivise over-invoicing/money laundering and is generally accepted by WTO as a legitimate mechanism to prevent dumping.
6. I do not know what would have happened to the domestic steel industry if we had not introduced MIP.
7. Not too much is available in the public domain about money laundering allegations related to MIP. It is possible there was a good way to counter money laundering, but I do not know.

Appendix

1. Assuming a Rs.5000 increase in steel prices per ton, a 3kg/sq.ft steel consumption and a Rs. 1000/sq. ft typical cost of construction, the rise in construction cost would be approximately 1.5% (Rs. 15 per sq ft). If approximately 42 million tons were used for construction, a total of 14 billion sq ft were constructed at a cost of 14.21 trillion (1015 per sq ft). This can be considered as 1000 units, each worth 14.21 billion each. The number of units that would have been constructed with the original price would have been 1,015.228 units (assuming elasticity 1). Without MIP, at a cost of 14 billion per unit (1000 per sq ft), total revenue would have been 14.213 trillion. So, in effect there was a revenue drop of 3 billion (irrelevant) and 1.5% less homes. At older prices, the value of that 1.5% more homes is approximately 210 billion. On the other hand, the steel industry got approximately 5000*42 million = 120 billion extra because of the price increase.
2. Inputs — Gross turnover of 4.288 trillion rupees(IBEF), 1.2% extra cost of production(Business Standard), elasticity of 1 (assumption). Calculation similar to 1, no difference in revenue, but 1.2% difference in output

References

1. https://www.statista.com/statistics/262747/worldwide-automobile-production-since-2000/
2. JPC Steel industry performance highlights
3. Siam India Automobile export statistics (accessed 15/2/2018)
4. Siam India Automobile production trends (accessed 15/2/2018)
5. Anupam Prakash, Nov 2016, Study of Policy Action of Minimum Import Price
6. SteelMint, Sep 2016, Indian Steel Industry Analysis: Pre and Post MIP
7. Indian Brand Equity Foundation (ibef.org) report on Automobile and Auto parts
8. Steelworld Research Team, SteelWorld In-Focus (Magazine), Feb 2016, pg 50, 51
9. Sohini Das, Business Standard, Feb 11, 2016 (Accessed 15/2/2018) Rise in Steel to hurt auto makers