steel: Commodity Talk: Will Trump tariff on steel, aluminium trigger dumping into India? Naveen Mathur of Anand Rathi explains

Do you see a significant impact on global metal prices once the Trump tariffs come into force and while India is not a major metal exporter to the US, will it have a trickle-down effect on the domestic industry?
As we all know, post Mr Trump’s inauguration in mid of January, the markets have been pretty volatile largely because of the policies, the global uncertainties with respect to tariffs. The tariffs would definitely push up the metal prices in the US due to restricted imports. While the excess supply in the global markets, particularly China and the EU, may cause price fluctuations, India would definitely have an indirect impact or I should say it is a mix of direct and indirect impact.

India is not a major exporter of metals to the US, but any global price shift would surely impact the domestic pricing also. If Chinese producers or the European Union producers divert supplies to other nations, including India, we may see a glut with respect to the oversupply. The cost competitiveness also therefore would come down for the imports coming into India and therefore, we might see the oversupply impacting our domestic industry, particularly on the metal sector.

So, it will have a negative impact largely with the dumping of the metals coming in from the EU or China to India and also with the price fluctuation, the cost of production might go up.

But the cost of import is expected to go up is what you are saying?
Kind of because of the volatility, means that if you are buying copper at a certain price and the copper prices because of the tariff and the uncertainty of the imposition of the tariff happens, the prices will reach a different level altogether. So, what you were buying yesterday and what you are buying today, there is a huge difference between the two days and the prices. And if the prices are high, definitely you are therefore importing the metals at the higher prices, using it as an input, the higher prices would lead to the higher cost of production, so that is what I am trying to say.

Are there specific sectors which will be impacted more than the others?
I would say the automobile industry and the infrastructure set-up would definitely be impacted with whatever is happening. Particularly, I would say these are the two industries which would have a very big impact because infrastructure uses these metals for various purposes and the automobile industry also. So, largely it would be these two sectors. But then yes, manufacturing would surely be another part which would get impacted, but the impetus is that it will be good for ‘Make in India’ kind of an initiative. If you see as an example, we import steel and we levy around basic customs duty of around 7% to 8% on the various grades which we import steel into. Now, say, for example, if India imports at 7%, you have put a tariff on the steel for China at around 25%, definitely the landed cost or the imported cost of steel would be much higher in the US of the China product landing there. So, China would find or some other countries of these metals would find a different nation or a source for the supply of what they produce. And India imports and therefore levies 7% to 8%. So, say, for example, if China dumps in India at 7-8%, the competitiveness of the Indian markets would take a hit and therefore, the Indian industry, the domestic industry, therefore, is intending or thinking about or I would say requesting the government to put kind of a safeguard duty of 15-20% beyond 7-8%. So, therefore, the dumping possibility would get lessened out for countries like China to dump the metal in India.

So, it will then be competitive, means you will have 20-25% import duty in India and at the same time you would also have the same kind of duty in the US. So, the domestic suppliers or the domestic industry would kind of be safeguarding the interest by putting this additional duty beyond 7% to 8% basic customs duty which we levy on steel. So, I think that would be something which we should look into as far as safeguarding the interest, the domestic interest of the manufacturers is concerned.

In fact, there has been a longstanding demand from the industry to levy a 20% to 25% duty on steel. So, I just wanted to understand that in case the government agrees to levy this duty, what will be the impact on the margins of the domestic companies?
The impact will be without a doubt. As I mentioned earlier, it will be much more of an impetus to the locals. See, there are certain numbers which I would like to share with you. Now, India is the second largest producer of crude steel, but imports finished steel in certain numbers.

I would also like to touch upon the impact of the rupee. We are basically seeing that the rupee has been on a declining curve and currently, it is trading around 86 against the dollar and this is when the dollar itself has fallen by 1.4% on the year-to-date basis… so, I would like to understand the impact of a falling rupee on the domestic metal market.
Very relevant question. The dollar index actually appreciated to a level of 110 post Trump coming into or post the elections in the US. We are currently at 107, 108. The dollar index has gone down, but the rupee has not appreciated largely. Various factors are impacting the emerging market currencies and therefore India too.

Apart from the geopolitics, the other thing is outflow of FPI or the FII outflow. So, last September, October onwards about $25 to $30 billion have been on the outflow. It is just that the domestic markets, the institutions have been able to withhold that particular kind of money getting out of the Indian capital markets. But $25-30 billion have been out, month on month we have seen the outflow, so that was one of the other reasons.

We have positive prospects as far as the other countries are concerned in terms of our standing, in terms of the RBI‘s foreign reserves, in terms of the government going ahead full throttle in terms of reforms, the political scenario, all those things, the consumption story post the budget.

But coming back to the issue of falling rupees, would that not make imports expensive for us…?
I was coming to that. I was trying to reply to your question that the dollar has fallen, but the rupee has not appreciated. So, the RBI did intervene… RBI did use the foreign exchange reserves to keep the rupee or I would say, kind of 86-87 levels. Now, you rightly said that it would impact. So, it would be positive for the service sector industry who exports IT, ITeS, all those industries which are export-oriented. But at the same time, the imports would get hurt and therefore, I would say the industries which are largely import-oriented would feel the impact of the rupee depreciation against the dollar.

What is the situation for base metals and where is the action currently and where is it lagging?
Action is only in two base metals packs. One is copper, the other one is aluminium. So, there are only two of the base metals which have an impact, which have been talked about for these tariff discussions. One is aluminium, the other one is copper. We really do not know what would be there for the other metals per se. But as of now, as of this particular moment, I can only comment that aluminium and copper have been the most hit because of the talks on the tariff, particularly with China, Mexico, and Canada.

Copper prices shot up after the reciprocal tariff announcement was made and then they are now on a kind of cooling down …
So, it (price trend) was speculative. It was pure and pure speculation. Now, imagine aluminium is anyway oversupplied, but still prices were touching highs on the upside. So, there is no reason, it was just the fundamental news on the tariffs. The equations around the tariff, people coming to the reality of adjusting to the tariffs, and therefore we did saw a speculative arbitrage happening between LME and CME and the prices holding up.

As far as the demand is concerned, I would say for aluminium, the global oversupply hang is anyway there. We feel that the markets would come under pressure and therefore we do not see too much on the upside for aluminium. But for copper and nickel, as far as other base metals are concerned, we still feel that there is some steam left out so buy on the dip strategy.

But I would recommend for all the people who are part of this particular or listening to this show or are interested, that they must hedge the exposure with respect to metals and the currency at all times because we will never be the same again in the normal times. The markets would be volatile and therefore, the volatility would have a huge impact on the margins if you are not hedged.

What trades should actually traders make?
I would say nickel and copper. Copper still can be bought on dips. Now, dips does not have relevance as of now, but then at a little lower level than what we are.

But I would say that the aluminium does not have the real demand the way the prices have moved up. So, shy away from aluminium. We might see a bearish trend for the short term.

But within India, yes, definitely MCX, you must hedge your positions with respect to metals. And at the same time, as I said earlier, currency would be volatile.

I just wanted to take your view also on the bullion, because we have been seeing gold and silver rising like anything. So, what is your advice to investors in bullion?
I think $3,000 levels would be something to look out for. It is a safe haven demand, which is coming in the central banks, the geopolitics, the global uncertainties, the Federal Reserve, in spite that the dollar is depreciating, we are not…, means I would still say…, means my gut from…, see, it is very difficult these days. Too many factors impact too many things. So, personally and professionally and even the gut says that 2,950 to 3,000 dollar levels, we are around those levels, we did touch 2,960, 2,970, should be on the high as of now. If we do not see any negative…

And on MCX what is the target?
Rs 86,000-85,000.

So, which means that the gold will see some correction from the current levels?
I think it would be there, so it would be around 85,000-84,000

Are these levels right for making an entry for a fresh investor and what should be the strategy?
No. Then, you should not lump sum at these levels. Means, we are in a very tricky world, honestly. Gold serves the purpose. Silver is a separate story altogether. Gold serves a purpose as a safe haven. Now, because of these issues which we are facing in the last one-and-a-half months or so, we are seeing a safe haven demand coming in. So, fundamentally, there is nothing as such that people are flocking to gold to buy jewellery in India or what.

It is just a relationship of the dollar, the dollar prices, the rupee depreciation, and therefore, the dollar multiplied by rupee against the dollar, your gold prices in rupee terms. The central banks are fine.

There is no doubt that people are buying gold for diversification of their asset and I must say, since you have raised this, I always keep saying in this talk that around 10% of your portfolio should always be in safe haven and particularly in gold. Means now, though you have a lot many things, 10 years before, you just had the ETF on the physical markets.

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