EMERGING RISK 3

Geo-economic constraints imposed on foreign importers, such as proposed cross-border climate change regulations and trends may impact future sales, profitability and growth.

Description

• Globally, there’s growing emphasis on climate change abatement regulations, such as the EU carbon border adjustment mechanism (CBAM), introduced on October 1, 2023, proposing a 25%-30% tax w.e.f. 2026 on steel and aluminium imports from carbon-intensive producers
• Under CBAM, many EU importers will be charged a carbon price on their scope 3 emissions (resulting from partner’s business activity) which they may choose to pass on
• This tax will level the playing field between domestic and imported goods from non-EU countries, preventing ‘carbon leakage’ by mitigating the unfair advantage of weaker climate policies in exporting countries
• The tax is expected to extend to all other imports into the EU by 2034; similar regulations are also planned by countries such as the US, Japan and Canada

Possible Impact

• Indian steel exports to Europe may be majorly impacted. With zinc being a key product in steel manufacturing (used for galvanisation), its demand may get impacted, leading to lower unit costs and premiums. This may affect revenue and EBITDA from zinc exports to the EU
• Zinc being a carbon-intensive industry, these tax mechanisms could extend to it, potentially increasing imported zinc’s prices and reducing its competitiveness against domestically produced zinc in the EU. This may impact demand for foreign zinc, driving down prices
• Increase in costs for steel/zinc producers outside the EU to maintain compliance with the EU’s climate policies
• Increase in internal costs as zinc producers are pressurised to reduce their carbon footprint to remain competitive in the market

Mitigating Actions

• Exploring export opportunities in markets other than countries that have levied these taxes
• Transitioning our operations towards renewable energy - producing more green products like green zinc will help Hindustan Zinc meet the growing emissions targets set by different countries