India Ratings & Research (Ind-Ra) said it revised its outlook on Indian steel producers to ‘negative’ from ‘stable’ for H2FY13. “The negative outlook is in view of the higher-than-expected deterioration in the financial and liquidity profiles of rated issuers. The continuous weak macro-economic environment in India has resulted in muted demand for steel products from the end-user industries,” the credit rating agency said.
Ind-Ra apprehended that domestic steel demand will remain subdued in the second half. However, it felt growth is likely to gain momentum in 2014 on a foreseen recovery in economic growth. The World Steel Association forecasted local steel demand to grow at 5.9 per cent and 7 per cent in 2013 and 2014 respectively. The real consumption of steel in India grew by a modest 3.3 per cent in FY13 against 6.9 per cent in FY12.
Margins
Ind-Ra expects steel producers’ profit margins in FY14 to remain broadly similar to the FY13 levels despite a fall in key raw material prices. Margins will remain under pressure due to the persistent high cost of steel production and steel producers' limited ability to pass on higher costs.
The agency thought that the proposed move to increase the iron ore royalty to 15 per cent from 10 per cent, if implemented, could further exert pressure on margins. The steel producers’ ability to raise steel prices in the local market is also constrained by global oversupply conditions.
Rupee depreciation by over 8 per cent since January 2013 pushed up imported coking coal prices and squeezed margins of companies producing steel through the blast furnace route.
Mining
The domestic iron ore mining industry is undergoing a difficult phase given regulatory intervention in various States. This intervention bodes well for the industry in the long-term. However, in the short-to-medium term, steel producers could face inadequate availability of domestic iron ore.
Ind-Ra-rated steel producers include Steel Authority of India Ltd (AAA/Stable), Tata Steel Ltd (AA/Negative), Rashtriya Ispat Nigam Ltd (AA/Stable), Uttam Galva Steels Ltd (A/Negative) and Usha Martin Ltd (A+/Negative).