STEEL Producers’ H213 Outlook Negative on Muted Demand - India Ratings

New Delhi, July 10, 2013: India Ratings & Research (Ind-Ra) has revised its Outlook on Indian steel producers to Negative from Stable for H213. 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 rating levels of Ind-Ra rated steel producers already factor in inherent risks in the steel sector; this contributes to the higher proportion of Stable Outlooks and most of the issuers being rated below ‘IND BBB-’. Some companies with deteriorated credit metrics also have Stable Outlooks as the agency has already taken rating actions to accommodate foreseeable stress.

Ind-Ra expects domestic steel demand to remain muted in H213; however, growth is likely to gain momentum in 2014 on the back of a recovery in economic growth and expected infrastructure push by the government of India (GoI). World Steel Association has forecasted steel demand in India to grow at 5.9% and 7% in 2013 and 2014, respectively. The real consumption of steel in India grew by a modest 3.3% in FY13 (end-March) against 6.9% in FY12 due to the slowdown in the end-user industries.

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. This has been due to the subdued demand from the end-user industries. GoI’s proposed move to increase the iron ore royalty to 15% from 10%, if implemented, could further pressurise the margins. Steel producers’ ability to raise steel prices in the Indian market is also constrained by the global nature of the market, coupled with oversupply and weak demand in the international market.  

INR depreciation by over 8% 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 margin pressure is despite the import price parity of flat steel products. The prices of long steel products will continue to be driven by the domestic demand-supply situation given their limited imports.

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. 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.

A Stable Outlook may result from a sustained improvement in the Indian macroeconomic environment leading to superior growth in steel demand from the end-user industries. Positive rating changes are unlikely in H213, with Ind-Ra being more likely to take rating actions on individual companies rather than on the sector as a whole.

In H113, Ind-Ra took negative rating actions on four steel companies and revised the Outlook on one to Negative from Stable due to their greater-than-expected liquidity issues and high financial leverage. However, the agency upgraded the ratings of four steel companies due to their improvement in credit profiles.

Ind-Ra-rated steel producers include Steel Authority of India Limited (‘IND AAA’/Stable), Tata Steel Limited (‘IND AA’/Negative), Rashtriya Ispat Nigam Limited (‘IND AA’/Stable), Uttam Galva Steels Limited (‘IND A’/Negative), Usha Martin Limited (‘IND A+’/Negative). 

(Source: Manager – Corporate Communications and Investor Relations, India Ratings & Research -A Fitch Group Company.)