Scrap valuations revisions in limelight

KASB Securities

Dear Clients,

According to fresh notification on customs valuations, the Directorate General of Customs Valuation has linked re-rollable scrap to prices published by London Metal Bulletin. The notification issued on 25th Feb’21 came after consultation with relevant stakeholders and their grievances regarding previously adopted Fall Back valuation methodology. We assess the impact on local steel players.

The impact

The event is neutral for the local re-rolling mills and steel manufacturers. We assess immaterial financial impact of this development on listed long steel producers. The valuation benchmarking to prevailing LMB rates as opposed to defined fixed rates provides for a) clearance of cargo at invoice rates and b) eradicate mismatch on valuation caused by lagged import arrivals. Our discussion with industry players revealed that under-invoicing was not the core issue. The price volatility introduced burden on importers on higher assessed duties. This is explained by the instance where bulk buyers of scrap make purchases at lower rates. The fluctuating rates may leave the importer with heightened valuations on cargo upon its arrival after roughly 2 months of transit and vice versa.

The methodology

As per latest notification, the methodology remains unchanged for determination of value. The DG of Customs valuations continued to rely on Fall Back method for valuation that has simply replaced a fixed rate regime to a variable rate regime based on LMB published prices.

Background to methodology

Customs valuation rulings are determined on the basis of methodologies defined by Customs Act 1969. Historically, re-rollable scrap valuation was determined on the Fall Back valuation methodology as defined under sub-section 9 of Section 25 of the Customs Act 1969. Fall Back method uses a flexible approach on determination on the basis of a value derived from among the other value assessment methods. Based on consultation with relevant stakeholders, the valuation on scrap closely reflected prevailing LMB rates at the time of determination. 

KASB Research

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