By Siddharth Subudhi
The Central Board of Indirect Taxes and Customs (CBIC) recently notified the imposition of bilateral safeguard duties on imports of ‘Ferro Molybdenum’ (FeMo) manufactured in South Korea in order to safeguard domestic manufacturers from lower priced imports that the Directorate General of Trade Remedies (DGTR) had found that the increased imports of the product has caused serious injury to the Indian industry. DGTR initiated its investigations in September 2022 and released its final findings in May 2023. Subsequently, the CBIC notified the imposition of duties in October 2023.
The imposition of trade remedy measures is nothing new for India with the government of India imposing more than 500 anti dumping duties in the past to counter the flood of cheaply manufactured goods in the domestic market. The utilisation of trade remedies, while potentially justified, gives rise to certain concerns. For instance, resorting to anti-dumping duties, especially when the domestic applicant is a significant and resilient manufacturer of the product, may disturb market dynamics in favour of the Indian company. This could have consequences for downstream industries, particularly in the case of intermediate goods, and consumers who might bear the brunt of reduced competition through elevated final prices. Bilateral Safeguard measures applied against South Korea on FeMo exports however tell a different story.
The Superstrength Alloy
Molybdenum, a critical mineral first discovered by C Scheele in 1778, is not found free in nature. It was in fact first separated from molybdenite ore using a carbon reduction technique. The discovery of molybdenum was a watershed moment for manufacturing of arms and ammunition everywhere. The conversion of molybdenum to FeMo when used to manufacture steel and other alloys imparts significant strength and resistance to reaching high temperatures. It is procured by India’s ordnance factories, and other defence manufacturing companies including Bharat Forge and the Midhani Group. With the introduction of the Draft Defence Production and Export Promotion Policy 2020, it laid out a vision for the growth of India’s domestic defence production capabilities. Protecting supply chains for critical components used in the manufacture of military hardware is thus a critical part of the overall vision.
The challenges to India’s supply chain and defence manufacturing have become magnified because of the general shift in the industrial supply chain towards East Asia, such as South Korea in the case of FeMo. This shift in industrial manufacturing has placed India’s supply chain under threat, especially during wars. The importance of FeMo to our national security needs cannot be overstated. The manufacture of FeMo within our country’s borders is needed to secure military supply chains.
Challenges to the Indian FeMo Industry
The FeMo industry in India is only but a spec in India’s manufacturing prowess, with an estimated 15-20 MSME manufacturers employing approximately 5000 workers. The industry is equipped with a manufacturing capacity of approximately 20,000 MT, while India’s domestic demand stands today at around 11,000 MT. Ideally in such a situation, the entire demand should be met within our country’s borders itself. Even more so for a product with national security implications. The story here lies in the framing of the Comprehensive Economic Partnership Agreement (CEPA) with South Korea wherein exporters from South Korea were allowed duty free exports of FeMo to India. What is even more baffling is that Indian manufacturers are charged an import duty on the raw material at 2.75% – which makes it more expensive to manufacture FeMo in India. Even in the case of certain trade agreements with Chile and Thailand to underwrite the import duty on raw materials, exporters from those countries charge a premium that erases any cost benefit manufacturers of FeMo may receive in procuring raw materials from them.
India’s history with Free Trade Agreements (FTA) have rarely benefitted India in improving its merchandise trade. The agreement with South Korea has also caused significant damage to our domestic FeMo industry. According to the rules of origin laid out in the India – Korea CEPA, a product not originating within a country must have at least 35 percent local value addition to it. In the case of FeMo, South Korea neither has any local reserves of molybdenum ore, and value addition from Molybdenum oxide to FeMo is only 10-12%. Based on the rules of origin, duties on FeMo should not have been removed. But, the agreement has listed FeMo under the E-8 category that has gradually waived off complete import duty on FeMo. What this has done is that it has made South Korea significantly more competitive than the Indian domestic industry. With South Korea importing the raw material from China duty free and exporting the product to India duty free, Indian industry is now suffering from the threat of being overridden by cheap imports.
While CBIC’s recent intervention comes as a lifeline for the Indian industry, the safeguard duties imposed are only for a period of upto two years. What happens after? With the average raw material price for Roasted Molybdenum Ore (RMO) being around Rs 22,50,000 per MT during 2022-23, and the local value addition done only around 8-10 percent – The cost on account of custom duty (2.75%) to the Indian industry comes to about 25% of the value addition being carried out.
Treading the fine line
The Indian industry presently boasts substantial capacities that surpass the country’s internal demand. The tariff concessions extended to Korea have led to a notable surge in Korean imports both in absolute terms and in comparison, to India’s import figures and domestic consumption. This influx of Korean imports has been so pronounced that the Korean industry has expanded its capacities threefold, with additional expansions in the pipeline. Notably, Korean imports currently dominate, constituting over 90% of all imports into India. Despite ample domestic capacity, approximately 45% of the demand is being met through imports. The industry is currently operating at a capacity utilisation rate below 50%. The path to supply chain resilience and self-reliance is not without challenges. Transitioning from a foreign dependent supply chain model to a more self-reliant one requires strong policy interventions. It would be the right move to consider revising import duties on raw materials promptly, in order to support the Indian industry and enhance its competitiveness relative to South Korea.
The article has been written by Simran Bhardwaj, Indian Police Service (IPS) Probationer (2022 Batch) and Siddharth Subudhi, Senior Policy Analyst at the Centre for Digital Economy Policy Research (C-DEP)
This article first appeared in BW PoliceWorld, https://policeworld.businessworld.in/article/Strategic-Sovereignty-Safeguarding-our-critical-mineral-sectors-/13-12-2023-501992/