Expecting the domestic steel demand to remain muted in the second half of this year, India Ratings & Research (Ind-Ra) today revised its outlook on Indian steel producers to negative from stable for H213.

It forecast, however, that growth in domestic steel demand is likely to gain momentum in 2014 on recovery in economic growth and the government push to the infrastructure sector.

“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,” it said.

The rating levels of Ind—Ra rated steel producers already factor in inherent risks in the steel sector, it said, adding that “this contributes to the higher proportion of Stable Outlooks and most of the issuers being rated below ‘IND BBB-’“.

World Steel Association has forecast steel demand in India 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 (end-March) against 6.9 per cent in FY12 due to the slowdown in the end-user industries,” it said.

It added that it expected 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, it said.

This has been due to the subdued demand from the end-user industries, it said adding, government’s proposed move to increase the iron ore royalty to 15 per cent from 10 per cent, if implemented, could further pressurise the margins.

Steel producers’ ability to raise steel prices in Indian market is also constrained by the global nature of the market, coupled with oversupply and weak demand in global market.

“INR depreciation by over 8 per cent since January 2013 and the modest demand scenario have put pressure on the margins of companies producing steel through the blast furnace route. This is because they import the bulk of coking coal requirements,” the report said.

The margin pressure is despite the import price parity of flat steel products, it said. The prices of long steel products will continue to be driven by the domestic demand—supply situation given their limited imports.

The report said the domestic iron ore mining industry is undergoing a difficult phase given regulatory intervention in various states and 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. The recent lifting of the Supreme Court’s ban on iron ore mining from category-B mines in Karnataka could alleviate some of the raw material concerns of steel producers in the state.

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