KARACHI: As per the tax measures proposed in Finance Bill 2019, long steel manufacturers would be taxed equivalent to FED of 17% in sales tax mode instead of special arrangement where they were charged a fix rate of Rs13/kwh for electricity. [the_ad id=”31605″]“This proposal would require a net price hike of 6%-7% per MT (5K-6k per MT) to maintain the margins at the existing level, however, complete pass on is unlikely in our view. Consequently, this is expected to depress the demand for long steel products in the back drop of worsening macros in the country,” an analyst at BIPL Securities said.
It has also been proposed to levy a uniform rate across the country including the companies operating in FATA region to bring those companies under normal tax regime. Therefore, this will not only eliminate the tax advantage of the same companies but also make them less competitive to compete against other players like Mughal Steel.
Resultantly, the players operating in northern region are likely to witness a pricing advantage of Rs3k-Rs4k, which would bode well for the profitability. However, players operating in southern region would not get any benefit from such a measure.
During the 2QCY19, Mughal Steel Amreli Steel (ASTL) witnessed a price increase of 7% and 10% respectively, to pass on the impact of currency devaluation and higher freight cost. As per the management, the said companies’ volumes remained stable in the first 2 months owing to lower competition from uncompetitive players, however, lower working days during the month of June 2019 (18 working days) would dent the profitability of the quarter to some extent.
“Additionally, another bout of currency devaluation along with higher taxes require another price hike, putting the sector’s ability to pass on the impact under question,” BIPL Securities’ analyst said.
Finance Bill FY19 introduced a number of tax rate measures mainly freezing corporate tax rate at 29% for the next 2 years and rise in minimum turnover tax to 1.50% from 1.25% which would hurt the profitability.
Recall that the section 65B provided a 10% tax credit on the installation of new plant and machinery and was valid till FY21. But now, the tax credit facility would expire by the end of FY19 and the companies that have commissioned new lines would avail the tax benefit at a reduced rate of 5% instead of 10%
“This would negatively impact the players operating in both long and flat segments as a number of players are currently in the process of expanding and modernizing”.
The announced decline in Customs Duty on the import of billet would hurt the local manufacturers like Amreli Steel (ASTL) as this reduces the raw material cost of other re-rollers. However, would bode well for those who still rely on import of billet as a raw material like Mughal Steel.
It may be mentioned here domestic flat steel producers have raised prices of both CRC and HDGC by Rs3,000/ton in response to currency devaluation in this week. Government has proposed additional custom duty of 2% on CRC and HDGC (ex-China). This will increase imported flat steel prices by Rs2,000/ton.
“Nevertheless, the demand outlook is not too bright, due to higher interest rates, rising inflation and low expectations on development spending for FY20,” Arslan Ahmed at JS Global Capital said.
Historically speaking, local steel volumetric growth has followed the trend of country’s cement growth rate, which is eventually linked to GDP growth rate where volumetric growth tends to underperform when GDP growth rate falls below 4%. GDP growth rate target has been set at 2.4% (the lowest in a decade) for FY20, however, gradually improving to 4.5% in FY22.
Consequently, local volumetric growth already struggling in the backdrop of weak macroeconomic environment is expected to remain upward sticky in FY20 as well, however, exhibiting a slight recovery from FY21 onwards.