March 201536

In-Focus

Budget

disappoints

metal processorsase metals producers and Bprocessors are disappointed with the Union Budget presented by

the Arun Jaitley in the Parliament on February 28 for the financial year 2015-16. The Finance Minister has done a balancing act by giving some benefits in one hand and taking some from the other. So, the base metals processing industry which contributes nearly 50 per cent of copper and aluminium in secondary form with huge saving of energy and natural resources, got nothing in the budget that can be cheered for.

Budget proposals in favour

Customs duties on certain inputs like metal parts, insulated wires and cables and refrigerators compressor parts have been reduced. Special Addition duty (SAD) is reduced in metal scrap of iron and steel, copper, brass and aluminum from 4 percent to 2 percent to address problem of Cenvate credit accumulation.

The Union Finance Minister Arun Jaitley reduced special additional duty (SAD) on copper, brass and aluminium scrap from the existing 4% to 2%. While importing goods in India, the importer is required to pay SAD. The rationale behind levying this import duty is to counterbalance value added tax (VAT) (i.e. tax revenues of government) and boost the domestic suppliers (which would have been purchased from domestic market otherwise). The SAD is also known as Counter Value Duty (CVD). However, if the same goods are further sold out then refund can be available to importer to the extent of SAD paid. The importer of the said goods shall pay all duties, including the said additional duty of customs leviable thereon, as applicable, at the time of importation of the goods. After that, the

importer, while issuing the invoice for sale of the said goods, shall specifically indicate in the invoice that in respect of the goods covered therein, no credit of the additional duty of customs levied shall be admissible; (credit and refund is not available simultaneously). Also, the importer shall file a claim for refund of the said additional duty of customs paid on the imported goods with the jurisdictional customs officer. The importer shall pay on sale of the said goods, appropriate sales tax or value added tax, as the case may be; both intra-sale or inter-state sale is considered as subsequent sale and therefore payment of VAT/CST is eligible. The refund claims should be processed within the prescribed period of three months time. Thus, rationalisation in CVD is set to benefit importers of scrap and exporters of processed goods.

The government also proposed to increases the scheduled rate of clean energy cess levied on coal, lignite and peat to Rs 300 per tonne from Rs 100 per tonne. The effective rate of clean energy cess is being increased to Rs 200 per tonne from Rs 100 per tonne. This means, metals producers adhering to clean energy guidelines and promote clean energy in their plant premises, will be able to reap the benefit of the Budget proposal.

Apart from that, the government proposed to reduce the tariff rate of basic customs duty on bituminous coal to 10% from 55%. Thus, user of bituminous coal will be able to get massive benefit from the budget proposal.

Budget proposals not favoured

Basic Customs Duty on metallurgical coke is being increased from 2.5% to 5%. So, all benefits cited above are going to evaporate from the users of metallurgical coke. Met coke is used by steel producers other than integrated steel mills, chemical industries and foundries, and ferro alloy makers, among others. India being a net importer of metallurgical coke, cost of metal production will automatically rise. In the pre-budget submissions, the users of metallurgical coke had urged the government to raise import duty to 20 per cent to protect the industry from Chinese dumping. Metallurgical coke, also called met coke, is used for heating blast furnaces in steel units. "The coke manufacturing sector is currently battling against twin odds -- indiscriminate dumping by China and an inverted duty structure further to the announcements in the last budget," the Indian Met Coke Manufacturers' Association, said in a statement.

India's merchant met coke industry, which has an installed capacity of about 10 million tonnes, provides sustenance to over 1 million workers. About Rs 30,000 crore has been invested in the facilities. The association has alleged that China has resumed dumping of met coke. In 2004, it had set export duty at 5%, then raised it to 15% and subsequently to 40% in 2008. This duty was brought down to zero in January 2013. Since then, Chinese coke has flooded the Indian market. According to Resource-Net, a leading global observer of carbon products, China's coke

- Metalworld Research Team

In-Focus

industry has over capacity and is making sales at below cost, putting pressure on the Indian met coke industry. Companies like Gujarat NRE Coke and Saurashtra Fuels are under financial stress and have been referred for Corporate Debt Restructuring (CDR). This is because the market price of met coke is at times lower than the variable cost of production, according to reports.

Indian coke imports in the first half were 2.2 mt, of which half came from China. End-users are buying Chinese coke instead of domestic production," Resource-Net said in a recent report. "The import duty on met coke also stands at 2.5% today, same as that of coking coal. The import duty on met coke should be higher than that of coking coal since it is a value-added product and the value addition is being done in the country by domestic Industry.

Scrap processors under pressure

Faced with inverted duty structure local processors have decided to procure raw materials from primary producers like Hindalco Industries and Sterlite Industries for processing. Secondary copper producers have decided to use primary metal instead of scrap as raw material due to narrowing gap between the two competing raw materials on falling copper prices. Copper prices have declined over 11 per cent this month to hit five-and-a-half-year-low recently following "index re-balancing" under which global hedge funds pull out from asset classes with weak returns prospects to invest for higher

profits. Copper is trading currently at $5,596, the level not seen since June 2009. Aluminium, nickel and zinc have also witnessed a decline between 4-7 per cent recently. Secondary copper manufacturers normally blend 30-40 per cent of scrap with primary metals like cathode depending upon customers' specifications of the end product. The percentage, however, vary on the end use of the final product. "In a falling market, prices of both primary and secondary metal decline resulting into lower supply from overseas scrap exporters based largely in Singapore, Dubai, Hong Kong and United States. Since, they hold on to scrap inventory, Indian secondary copper smelters do not have any option but to seek additional quantity purchase of primary copper from Indian smelters like Hindalco and Sterlite", said D K Jain, president of Indian Non-ferrous Metals Manufacturers Association and managing director of Haryana-based Agrawal Metal Works, one of India's largest copper flat rolled products manufacturers.

Interestingly, India's import of copper scrap, according to industry sources, has declined by 25-30 per cent in the last three months. Both Hindalco Industries and Sterlite Industries, according to the Ministry of Mines, ramped up their copper cathode productions despite weak price sentiment. While Hindalco reported total copper production at 257,261 tonnes between April-November 2014 as against 203,259 tonnes in the corresponding period last year, billionaire Anil Agarwal

controlled Sterlite Industries posted the red metal output at 230,548 tonnes in the first eight months of the current financial year as compared with 162,321 tonnes in the same period last year. Experts believe, a large quantity of copper remained unsold this year due to weak demand which Sterlite Industries (India) Chief Executive Officer, P Ramnath rejected. "Whatever we produce, we sell leaving thereby no inventory. But, fall in copper price will raise domestic demand," he added. Secondary copper producers have been reeling under severe pressure at least for the last three years due to inverted duty structure with 5 per cent import duty on scrap and 'nil' on finished products from countries with Free Trade Agreement (FTA) with India. Fall in copper price is another worry for them as the cost of raw material purchase will continue to remain high due to lag effect of price on scrap, emphasized Rohit Shah, Managing Director of Perfect Valves.

Explaining the implications, B K Binani, managing director of Rashtriya Metal Industries and ex-president of Indian Non-f e r r o u s M e t a l s M a n u f a c t u r e r s Association, said, "In case of price rise, the difference between virgin metal and scrap widens and vice-a-versa on fall. So, it is a natural shifting from use of imported scrap as raw material to primary metal procured from domestic smelters like Hindalco and Sterlite." Jain pegs price difference between scrap and primary metals between 4-8 per cent under normal circumstances.

Copper Lead & zinc

Concentrate to be exempted from

basic customs duty

Basic customs duty on copper products to be increased from present 5% to 10%

Inclusion of concentrate through trade route to promote processing of gold locally

Basic customs duty on zinc ingots, lead ingots, zinc alloys, zinc scrap and lead scrap may be increased from existing 5% to 7.5%

Benefit for the industry

Basic customs duty on zinc oxide to

be raised from existing 7.5% to 10%

Basic customs duty on lead

concentrates be reduced from 2.5%

to nil

March 201537

Aluminium

Basic customs duty increase on

scrap from 2.5% to 5%.

Export duty of 5% on alumina

Inclusion of aluminium ingots

under interest subvention scheme

to increase its exports

Basic customs duty increase from

present 5% to 10%