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Steel producers' profit margins to remain under pressure this year

The cost of funding working-capital requirements remains high despite the marginal reduction in repo rate by the RBI in early 2012

Dilip Kumar Jha 

The of is likely to remain under pressure in 2013 despite a majority of producers revising their output price between Rs 500–1,000 a tonne in December last year.

A report by India Rating said that the marginal price increase is not going to help to revive their profitability going forward due to the persistent high cost of steel production and their limited ability to pass on higher costs following subdued demand from end-user industries. However, the margin pressure will be higher on the producers with no captive raw material linkages.

The cost of funding working-capital requirements remains high despite the marginal reduction in repo rate by the Reserve Bank of India in early 2012. India Ratings expects a gradual reduction in interest rates in 2013 which should provide some relief in interest costs. While higher-rated issuers invariably have access to bank funding and capital markets in certain cases, most issuers in the ‘IND A’ and below categories rely largely on bank financing and are severely affected by high interest costs.

Considering the modest demand scenario, a further rupee depreciation could pressurise the margins of producing flat steel through blast furnace route as bulk of coking coal is imported. This is despite import price parity of flat steel products. Moreover, a weaker rupee raises the financial leverage of with significant unhedged foreign-currency liabilities resulting in a decrease in financial flexibility. However, the agency expects financial leverage of rated entities to remain within the guidelines stipulated for the respective rating category.

The Indian iron ore mining industry is undergoing a difficult phase given regulatory intervention in various states. Even though this intervention bodes well for the domestic industry in the long-term, in the short-to-medium term, will continue to face inadequate availability of domestic iron ore and may have to import for meeting their requirements. India’s steel-making capacity is slated to cross 100mt in 2013 which will require about 160-170mt of iron ore. However, there could be a shortage of about 30mt given the ongoing challenges in the mining sector.

A negative outlook may arise from continued weak macroeconomic environment in India which could adversely affect financial and liquidity profiles of issuers beyond that expected by the agency. Positive rating changes are unlikely in 2013, with India Ratings being more likely to take rating actions on a company-basis rather than on the sector as a whole.

Hence, India Ratings expects credit profiles of its rated to remain stable in 2013, driven by continued albeit slow growth in domestic steel demand. The majority (92%) of ratings is on Stable Outlooks and most of them are below ‘IND BBB-’, which reflects the inherent risks in the steel sector.

has forecasted steel consumption in India to grow at 5% in 2013. may see a spurt in demand in the medium-term if the Indian government implements its $1 trillion infrastructure investment plan in a timely manner. The demand for flat steel from automobile, white goods and capital goods sectors is likely to remain modest in 2013, given the continued slow economic growth.

First Published: Wed, January 09 2013. 15:00 IST