There is a possibility of reduction in the margins of steel manufacturing companies

Business: Operating margins of primary and secondary steel makers could decline by about 2% due to new cess imposed by some states following the recent Supreme Court verdict, according to credit rating agency ICRA Ltd. ICRA said operating margins of primary steel producers could decline by 60-180 basis points, while secondary steel producers could face a sharper decline of 80-250 basis points (one hundred basis points equals one percentage point). ICRA said the impact of these new cesses could extend beyond the steel industry, potentially impacting the power sector and aluminium manufacturing. The agency also highlighted concerns about the possibility of states applying the cess retrospectively, which could put an additional burden on companies with existing tax liabilities. This view follows Supreme Court rulings on July 25 and August 14 that upheld states’ right to levy taxes on mining activities within their jurisdiction and allowed these levies to be applied retrospectively.

“This development will put pressure on operating margins across the sector, impacting both primary and secondary steel producers,” ICRA said. While state governments are yet to notify additional taxes, experts warn that any new levies will squeeze steel producers’ margins and push costs further up the value chain. “Imposition of new mining cess by major mineral-rich states could add cost pressures to the steel industry. While most states are yet to set rates, any major cess imposed could adversely impact margins, especially those of secondary steel producers, as merchant miners are expected to pass on the increased costs,” said Girishkumar Kadam, senior vice president and group head, corporate sector ratings, ICRA.