India's steel exports to Europe set to drop as EU carbon tax looms

By Neha Arora and Manvi Pant

NEW DELHI, Dec 5 (Reuters) - India's steel exports to Europe are expected to fall once the European Union's carbon tax takes effect next month, prompting mills to seek alternative buyers in Africa and the Middle East, industry executives and analysts said.

Imports of steel into the European Economic Area will face a carbon tax under the EU's Carbon Border Adjustment Mechanism (CBAM) starting on January 1. The decarbonisation-oriented levy will also apply to cement, electricity, fertilisers and other products.

Mills in India, the world's second-largest crude steel producer after China, ship roughly two-thirds of their exports to Europe.

Experts say Indian mills will need to cut their carbon emissions.

"We recognise that we have to do environment-friendly production and companies are gearing up to comply, but they are also looking at alternative markets too," Aruna Sharma, India's former steel secretary, told Reuters.

Most of India's steel is produced in blast furnaces, which generate higher emissions, said Sandeep Poundrik, the top civil servant at the Ministry of Steel, in September. He also said further expansion of blast furnace capacity is a concern.

Additional planned capacity could add about 680 million metric tons of carbon-dioxide-equivalent emissions from the sector, according to Global Energy Monitor, a U.S.-based research group.

Indian steelmakers have planned new investments to lift output as strong domestic demand - fuelled by government-backed infrastructure spending - continues to rise.

"Most of the companies are yet figuring out a way to deal with CBAM," said Ravi Sodah, a cement, metals and mining analyst at Elara Capital. "In the near term, it is expected to slow down India's exports to EU."

One way to mitigate the problem is to use electric arc furnaces, which emit far less carbon than conventional blast furnaces.

Two executives at large Indian steelmakers, who asked not to be named because they are not authorised to speak to the media, said companies had little clarity on how the tax would be calculated.

"About 60% of our exports go to Europe and we want to know what is the rate that will be levied and will it be company specific?" said one of the executives.

The levy will raise the cost of Indian steel exports to the EU, especially blast furnace products, squeezing margins and EU market share unless producers cut emissions, said Lakshmanan R, head of South & Southeast Asia corporates at CreditSights in Singapore.

To offset lower exports to the EU, Indian steel mills are trying to tap into the Middle East and offering quick delivery and flexible payment terms, said Shankhadeep Mukherjee, principal analyst at London-based CRU Group.

(Reporting by Neha Arora and Manvi Pant; editing by Mayank Bhardwaj and Thomas Derpinghaus)