How much of Indian Steel EBITDA is a gift from the government? :: Credit Suisse

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India Steel Sector UNDERWEIGHT N. Mishra
How much of Indian Steel EBITDA is a gift from the government? 9122 6777 3716
􀂃 The government of India now has a 7.5% import duty on steel and a 30% export duty on iron ore. This adds ~US$50/t to
the EBITDA of integrated steel mills (i.e., those having their own ore) and ~US$120/t to those of non-integrated mills. This
is 15-100% of steel companies' FY13E EBITDA.
􀂃 For a variety of reasons (export bans in some states, fall in output, export duties), India's iron ore exports fell 40% YoY in
FY12. While the clampdown on illegal mining impacted production of lumps as well as fines, the sharp rise in export duties
mostly helped domestic supply of fines, as lumps were only 10% of exports.
􀂃 This has driven a sharp increase in the lump-fines spread, helping companies capable of using fines. Lump-based
manufacturers (most smaller mills with ~30% of Indian supply) have struggled with profitability, helping steel prices.
􀂃 While it may sustain, we believe duty-driven EBITDA deserves a lower multiple. Further, even if duties don't change, the
upcoming over-supply (now pushed to 2HFY13) will make import duties inconsequential. We remain UNDERWEIGHT on
the steel sector.