Down the (s)melting pot

The non-ferrous metals sector, which got a raw deal from the finance ministers in his earlier budget, is expecting even tougher measures on February 28.

Industry officials are expecting very few incentives from the government on exports, which have been chosen as a major avenue of growth for the industry.

The customs duty on non-ferrous metals in the earlier budget was reduced to 15%, and this time, the industry expects it to be cut further to atleast 5%.

Officials said the industry could face further pressure on margins if there is one more duty cut. They are praying that the current customs duty levels are kept at 15%. The affected ones among the non-ferrous sector will be copper producers — Hindalco and Sterlite — who are essentially custom smelters. Custom smelters import copper concentrate — which is the basic raw material for producing copper — that is treated and refined to produce copper cathodes.

For the copper manufacturer, the effective duty differential works out to just 10% as they pay 5% customs duty on the imported copper concentrates. While some officials feel that customs duties on copper will also be reduced to 10% others are of the opinion that it might be spared. However, the industry would welcome the status-quo being maintained on copper customs duty.

Aluminium and zinc producers would also like see customs duties staying at 15%. Any reduction in custom duty on aluminium and zinc could narrow the margin between the domestic selling price and the landed cost of the metal.

Companies like National Aluminium Company (Nalco), Hindalco, Bharat Aluminium Company (Balco) Hindustan Zinc (HZL) currently price aluminium and zinc at a cost that is about Rs 3,000-4000 less than the landed cost of the metal.

Landed cost or cost of imported metal includes the cost of the metal on the London Stock Exchange, plus the customs duty as well as the countervailing duty, which is equal to the excise duty plus local taxes and other costs like freight, insurance and landing charges.

Aluminium producers in particular, are expecting a correction in the inverted duty structure that they currently face. Usually, all inputs are charged a lower import duty, while the final product is charged a higher customs duty. In case of aluminium, however, all major inputs are charged 20%, while the final product that is aluminium has a customs duty of 15%.

The industry is hopeful that the finance minister would correct the duty structure this time around.

The company most affected by this inverted duty structure would be Bharat Aluminium Company (Balco), controlled by the London-listed Vedanta Resources.

Balco which has increased its metal smelter capacity by 2.5 lakh tonnes per annum does not have the required alumina that is at least 5 lakh tonnes per annum to feed its smelters.
The company will have to import this alumina at 20% customs duty, which will render its smelter capacity unviable. Company officials are, however, hopeful that the 20% duty on alumina will be corrected to 5% and will be brought in line with the duty applicable to copper concentrates.

Copper concentrates are charged a customs duty of 5%. Non-ferrous metal producers who pay 16% excise duty would prefer duties to be further reduced, so that the cost of the metal is reduced to that extent for the consumer. This, officials feel, will make metals more affordable, thus increasing their consumption in the domestic market.

The industry, however, would be most pleased to see policies which will kick-start growth in infrastructure and housing projects in general, and specifically in the power and automotive sectors. The usage pattern of aluminium in India shows that 36% of the metal is used in electrical applications, 22% in automotive, 6% in machinery, 11% in packaging, 13% in building and 12% on other uses.

Policies that will drive the automotive sector, electrical applications, building and packaging, will directly result in increased domestic demand.

Copper manufacturers would also expect a budget that would help the power industry, the electrical engineering industry and the housing sector to grow, so as to raise domestic demand for copper.

The best shot in the arm for non-ferrous metals would be exemption of income tax on export income under section 80 HSC. An exemption would make the sector highly profitable, as the industry is expected to double in size in the near future.